005: The Economics of Prohibition with Mark Thornton
005: The Economics of Prohibition with Mark Thornton
Throughout human history, economics has played a major part in setting policy and inspiring actions of all kinds, including prohibitions – and few have a deeper understanding of prohibitions than Dr. Mark Thornton.
Dr. Thornton is a Senior Fellow at the Mises Institute and an economist who’s written and spoken extensively on the topic of prohibition. In addition to his work at Mises, Mark serves as the book review editor of the Quarterly Journal of Austrian Economics, and his own writings spans three decades, starting with The Economics of Prohibition and culminating in his recent book, The Skyscraper Curse: How Austrian Economists Predicted Every Major Economic Crisis of the Last Century.
Today, Dr. Thornton joins the podcast to discuss why prohibitions never successfully squash demand for prohibited products, the common factors that both inspire prohibitions (and lead to their failure), and why he thinks we’re closer than ever to federal legalization.
- Why government prohibitions of entire product lines are untenable situations – and the factors that historically have led to their repeal.
- The common reverse side effects of federal prohibitions – and how they ultimately set the stage for these policies to fail.
- How prohibition led to the creation of income tax as we know it.
- The restrictions on cannabis that are keeping the black market alive in some states.
- Why national enforcement of the current cannabis prohibition could blow up in the government’s face and create serious challenges to the will of federal power.
“The Baptist preacher and the bootlegger have a shared interest in maintaining alcohol prohibitions.” – Dr. Mark Thornton
“Henry Ford and others had built automobile engines to run on alcohol, but alcohol prohibition squashed that whole side of the market.” – Dr. Mark Thornton
“If the war on drugs did not include cannabis, the negative effects of the war on drugs would be much more limited than they are today.” Dr. Mark Thornton
- Mises Institute
- The Economics of Prohibition
- The Skyscraper Curse: And How Austrian Economists Predicted Every Major Economic Crisis of the Last Century
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TRANSCRIPTRead the Transcript
Rick Kiley: Hello, everyone, and welcome back to The Green Repeal. Today we’re changing gears a little bit to talk about prohibition, specifically, the economics of prohibition. We’ll cover prohibitions with a small P, Prohibition with a capital P, and then with what’s going on in cannabis prohibition today. Our guide on our journey is Dr. Mark Thornton, Senior Fellow at the Mises Institute and an economist who’s written and spoken extensively on the topic of prohibition. In addition to his work at Mises, Mark serves as the book review editor of the Quarterly Journal of Austrian economics, and his own writings spans three decades starting with the 1991 book, the Economics of Prohibition, and culminating with his recent book, The Skyscraper Curse: And How Austrian Economists Predicted Every Major Economic Crisis of the Last Century. Mark is a graduate of St. Bonaventure University and received his Ph.D. in economics from Auburn. He’s served as a member of the Graduate faculties of Auburn University and Columbia State University and has also taught economics at Auburn and at Trinity University in Texas. He’s both passionate and knowledgeable about the economics of prohibition. And we hope you enjoy the conversation.
Rick Kiley: Hello, everyone, and welcome back to The Green Repeal. Today we have with us an economist, Mark Thornton, who’s a Senior Fellow at the Mises Institute down in Alabama. And we are really happy to have him with us today to shed some light on the economics of prohibition. Welcome, Mark.
Dr. Mark Thornton: Hey, it’s great to be on The Green Repeal Podcast.
Rick Kiley: All right. Thank you for the plug. So, let’s just jump right in. I think you do Introduce yourself as an economist. I’ve been reading some of your work. You do seem to be part historian as well. When you tell people what you do, is it I’m an economist or I’m an economist plus? How do you define yourself?
Dr. Mark Thornton: Well, I definitely would describe myself as an economist. I might reference that I’m an economist at the Austrian School of Economics and I do do a lot of history, but its economic history and that’s very different from what historians do. They dig up the facts and we use and try to explain the facts. And so, the whole tenor of what an economist does is going to be very different from what a historian does. Now, one way I explain that to people is that I co-authored a book on the economics of the Civil War and it was 150 pages long. At the same time, you have American historians publishing multiple books that might be 350 pages on a single union regiment. So, it’s a big difference but I like to stay within the economics camp.
Rick Kiley: Sure.
Jeff Boedges: Yeah, I would think that there’s a lot of human history that can be traced back to economic motivations and economic factors that influenced the way things were done. Certainly, some of the more notable 20th-century wars and whatnot, you could probably trace back to economic sparks that really started those fires blazing.
Dr. Mark Thornton: Yes. So, we have an economic theory as a way of interpreting the facts of history and so we’re going after explaining things like inflation through increases in the money supply, whereas historians would give you blow-by-blow inside information about all of the details of what is going on. And so, we very much rely on historians to paint the picture and then we try to explain it.
Rick Kiley: Got it. That makes it very clear. That’s awesome. So, we’re talking about a lot of different things on this podcast and we’re talking about cannabis marketing but we’re talking about prohibition. And the reason we want to invite you to speak with us today is because you’ve written extensively on the idea of prohibitions in general, so not just alcohol prohibition. But so, I’m curious as we get started with the conversation here, when you define the word prohibition, at least in economic terms, what does that mean?
Dr. Mark Thornton: Well, for me, prohibition means a government mandate, that prevents the legal production, distribution, and consumption of a good or service and it’s typically the whole area or subject of a good, not just very narrowly defined good. And so, when we refer to alcohol prohibition that means beer, wine, and liquor, the whole product line, basically whereas it wouldn’t make much sense to outlaw a particular type of beer because there are such easy substitutes for any particular type of beer that it would make sense for the government to make such a mandate and it would have very little economic impact. So, we’re usually talking about the prohibition of a whole line of products.
Jeff Boedges: Categorical prohibition. Sure.
Dr. Mark Thornton: Correct. Yes.
Rick Kiley: Got it. And I’ve read some of what you’ve written so not all of it, forgive me, but when I read some of your writing, my takeaway is that you’re of the mind that and maybe this is the school of economic thought you come from, but that prohibition is really an untenable situation like at least that’s your perspective. Is that fair? Is that a fair assessment of mine? Is that what you believe?
Dr. Mark Thornton: Yes, I think that is a fair assessment, that government prohibitions of whole product lines are really untenable. They’re really, you know, you can try to enforce them. You can use massive amounts of resources to try to prevent the production, distribution, and consumption of that particular product or any product line that the government wants to do away with and I think the facts of history justify that. However, there are all sorts of prohibitions in our daily lives, which are very tenable, and this is the category of private prohibitions where a private property owner enforces a particular type of prohibition. And so, grocery stores and corner stores, for example, will put a sign on the front that says, “No shirt, no shoes, no service,” and that just that one sign effectively enforces that prohibition. I was just listening to the local sports radio station and they were looking at the issue of the pre-game parties at Brigham Young University where, of course, it’s a Mormon University. They prohibit alcohol and, basically, there’s probably some people drinking alcohol but just the fact that you’re on the campus, that’s a general dictate of the campus and the religion, and people generally follow that private prohibition.
Jeff Boedges: I noticed that’s not the most well-attended pre-game party in the United States by the way.
Dr. Mark Thornton: Yeah. It’s relatively new and it had to be organized by somebody because it was just that foreign to the people.
Jeff Boedges: Hence, the reason.
Rick Kiley: “What is this? It’s a gathering of people.” Okay. So, I mean, when you say that the governmental prohibition isn’t really feasible, like what is the theory behind it? Is it largely like the economic theory states that this can’t happen, like the costs to basically enforce and keep this prohibition intact eventually overwhelm?
Dr. Mark Thornton: Yes.
Rick Kiley: Why is that the case?
Dr. Mark Thornton: Well, basically, when the government mandates a prohibition, that does effectively shut down all the people in the free market. In the case of alcohol production, the brewers, the wineries, the distilleries, they all do shut down, and the workers are dispersed, and the whole supply chain is completely disrupted. But as the price of existing stocks starts to rise, that provides an incentive, a monetary economic incentive for people to enter the black market, to produce alcohol products illegally, illicitly to distribute them, and ultimately, to sell them to consumers. And so, the fact that the private free market has been squashed leading to higher prices of existing stocks creates that profit margin and profit margin can be very, very high so that the profit margin for legal distilleries is maybe 5% to 10% but the monetary profit margin for black market distilleries can be 300% or 400%. And so, that basic incentive lures producers into the black market and sets up an entirely different but very similar supply chain.
Jeff Boedges: Right. So, basically, prohibition doesn’t necessarily squash demand.
Dr. Mark Thornton: No. It doesn’t do anything to demand unless people for ideological or religious reasons, if people truly buy into the government’s mandate, then the prohibition is more likely to be very effective but the prohibition itself doesn’t alter people’s demands or their views of a particular product. So, the demand stays there. It’s a supply-side disruption and from what we’ve seen, the government’s propaganda campaigns in the case of alcohol back in the 20s or cannabis in the 70s, and 80s, and 90s, with a public service announcement telling you how these things are terrible for you and so on, never really had much impact in the early days of cannabis prohibition. And really, one of the main reasons why it got started was that in the 1930s the Hollywood would create B movies based on cannabis leading to insanity, murder, crime, suicide. And so, the people back then believed or many believed that cannabis would have those kinds of effects on you but as you come forward in time, obviously, people have discovered that the government whether it was Hollywood in 1930s and 40s or the government in more recent decades have basically been misleading people about the true effects of the product that are related to cannabis.
Jeff Boedges: And do you feel that that would somewhat erode their credibility, and then, therefore, have a kind of almost a reverse effect?
Dr. Mark Thornton: Well, yes, and that’s very unfortunate of the fact that the government lies about certain things like this. And then people start in the 1960s find out that, well, that’s not really true and you come forward in decades and so many more people have personal experience with cannabis and cannabis products that the credibility of the government has been eroded away greatly in this and other areas as well.
Jeff Boedges: Yeah. It does have a spillover effect to where it’s not just you lose credibility in one area. You can lose it in many for the same reason.
Rick Kiley: Yeah. I think our government has been plotting lies a couple of times, probably.
Jeff Boedges: I don’t know. Just a few.
Rick Kiley: Well, let’s just take a step back and talk about like alcohol prohibition in America. And one thing I saw that really caught my eye that you wrote is, historically speaking, you noted that actually a lot of economists I guess this is the 19-teens, the 1920s, they were arguing pro-prohibition and I think that was found not to be the case. But what were the arguments that they were using in support of prohibition in America?
Dr. Mark Thornton: Well, one of my heroes in economics is Gordon Tullock and he wrote in one of his textbooks that if policymakers that only contacted economists, they would have been informed that alcohol prohibition would have never worked. Well, I’ve done research on this topic and economists of the time were progressives and we were in the Progressive Era. And so, their ideology was that they could fix any problem in society with the use of proper policy. And so, they were all personally opposed to alcohol and they felt that alcohol caused a lot of damage to the economy and so they thought that alcohol prohibition would be a boost to the economy as resources were allocated away from alcohol, which doesn’t cause any economic productivity and into other areas. And so, they were firm believers in alcohol prohibition and many of those progressive economists were leaders in the prohibition movement.
And the most famous American economist at the time, Irving Fisher, was probably one of the biggest proponents of alcohol prohibition that there was. He wrote three books on the subject, trying to promote the policy and to stabilize it in terms of public opinion and he never really turned his back on that. He thought alcohol prohibition, despite the building of evidence in the 1920s, was still a good thing and that it could be fixed, it could be fine-tuned, we just need to get the right people in charge of enforcing it. But ultimately, the case for alcohol prohibition deteriorated very badly in the public mind.
Rick Kiley: Right. So, before we go into like why it collapsed, I’m really curious like was the idea that alcohol was like on a macro level diminishing American’s productivity like the fact that if we removed alcohol from like the workplace that there’ll be fewer accidents and people will generally be more productive and it would lead to an economic boom? Like was that sort of like the flow of the argument? I’m just curious as to why people thought the prohibition would have a positive economic impact.
Dr. Mark Thornton: That’s a very good question. And what their thinking was, was that alcohol consumed on the job could lead to accidents as you suggest and alcohol have been consumed at work for a very long time, particularly in farming, but in certain manufacturing and factories, and they also thought that alcohol was bad for your health. And so, that eliminating the alcohol, people would be healthier and live longer and that sort of thing. And finally, the prohibitionist economists thought that consuming alcohol in large quantities meant that people wouldn’t show up for work as often. So, men would take the paycheck, get plastered, and then not be able to show up for work the next day. And also, of course, they were diverting money away from the household budget, which led to other social problems. So, they saw alcohol is permeating into so many different areas of the economy and the family that they thought that they could cure all that with a government mandate.
Rick Kiley: Got it. Okay. Cool. And why were they so wrong? I mean, like, how did this fall apart? Like what started happening that made it clear that, oh, we got a bad theory going on here?
Dr. Mark Thornton: Well, another good question, because America has lots of experience with prohibition before the national prohibition of the 1920s. We had state prohibitions. We had local prohibitions. We had all sorts of logs to restrict alcohol consumption, alcohol sales.
Rick Kiley: We still do have dry counties, right? Yet, we still have some places where it’s dry.
Dr. Mark Thornton: Yeah. There’s a few dry counties in Alabama and the Appalachians and we actually have a theory about that in economics, which says that in certain areas, the Baptist preacher and the bootlegger have a shared interest in maintaining alcohol prohibitions. The Baptist preacher doesn’t want his flock drinking and not showing up in church and sinning through various ways. And so, the Baptist minister wants the prohibition of alcohol while the bootlegger depends on the alcohol prohibition for his job. And so, if sales are legal, then the bootlegger and the moonshiner are all put out of business.
Rick Kiley: I got it. That’s cool. All right. So, what changed? How did we move from the part where, okay, it’s apparent that this is starting not to work? Were there major like economists at the time who were part of the driving force is towards getting the passage of initially, I guess, I’m going to ask two questions. So, who were the people that were like helping getting the initial passage of the 18th amendment and the Volstead Act? And then, later on, were there people who are like leading the charge to sort of actually get them repealed? You know, were there economists or economic factors that were like leading into both of those things?
Jeff Boedges: And then whether flip-floppers were the people who were pro in the beginning and it’s like, “Not quite. This is a mistake,” and actually had…
Rick Kiley: Yeah. I voted for it before I voted against it, kind of thing.
Dr. Mark Thornton: Well, that’s happening in this cannabis legislation and votes.
Jeff Boedges: Frequently.
Dr. Mark Thornton: That people who were opposed to it and thought it would be legalized and cannabis would be a big problem, a couple of years later, they realize, well, the world hasn’t fallen apart and schools are getting funding and other things. So, yes, there were flip-floppers but the passage of the 18th amendment to the Constitution, which along with the Volstead Act was alcohol prohibition went to effect in 1920 and there were pressure groups in society like the anti-saloon league.
Rick Kiley: Anti-saloon league.
Dr. Mark Thornton: Yeah. The women’s…
Rick Kiley: I wonder what they are today.
Dr. Mark Thornton: It’s a Christian organization. And so, these were organizations that were directly promoting alcohol prohibition, behind them lie tens of thousands of different churches, some whole denominations and a lot of groups, public pressure groups that supported this whole edifice of moving towards national alcohol prohibition. And then there were big-money donors like John D. Rockefeller, who was a Baptist. He didn’t drink alcohol himself and he thought it was a good idea. He is said to have donated somewhere along the lines of $1.5 million and back then, one ounce of gold coin was $20. So, you can imagine you have to multiply that by 50 or 500, I’m not sure which, but it was a massive amount of money into what was basically a voluntary type of an organization. And so, that financed the organization itself in a massive amount of anti-alcohol literature, propaganda, and the like, and they also put pressure on politicians.
So, they would form a local voting bloc of pro-prohibition voters and then they would go to the politician and say, “What’s your position on alcohol prohibition?” and that threatened a lot of politicians to pull in that direction because they couldn’t afford to lose such a large voting bloc in a single election. So, they had very modern campaigning and pressure techniques that were really relatively new in the American scene. And so, state-by-state, they would put pressure on legislators and voters to turn to sign the constitutional amendment and it didn’t take all that long to get passed.
Rick Kiley: Right. This is like you’re saying, like the heyday like lobbying really coming into its own, right? This first Super PAC. I mean, so it was social and political pressure that was on everybody including like economists. So, were these groups with Rockefeller and the like were they basically finding and/or funding economists of the time to basically create an economic viewpoint that aligned with their political motivations? Was that what was happening?
Jeff Boedges: Was it basically created as a prop to stand it up to give it some back.
Dr. Mark Thornton: A little bit of both, guys. These groups didn’t have direct hiring powers at universities and that kind of thing but the whole profession was progressive socialist-leaning, reform-leaning economists, and other social scientists. And one thing about Rockefeller to take note of is that the 19-teens was when the automobile was coming about and there was this whole issue of which fuel to use in automobiles. Rockefeller, of course, had cornered the market in kerosene and then gasoline but the other main competitor was alcohol to fuel cars. You know, we have a little bit of alcohol in our gasoline today. Self-interest, yes. It’s self-interest in the political sense because with one swoop he was able to completely knock out the main competitor to become the fuel of the future in automobiles. And Henry Ford and others had built automobile engines to run on alcohol, but alcohol prohibition squashed that whole side of the market.
Jeff Boedges: That’s the first I’ve ever heard of that particular little theory.
Rick Kiley: That’s unbelievable.
Jeff Boedges: That’s crazy. I’ve had some bad spirits and I would definitely put into a gas tank but that’s the first time I’ve heard anything spirits.
Rick Kiley: Well, I mean, it sounds like a sound deductive argument but I just hadn’t heard about that far. I’m curious and I guess maybe it doesn’t even matter if people were offering positions that were fitting sort of a social and political movement, but you mentioned a few minutes ago that economists were not unfamiliar with the idea of what a prohibition can do, but I’m curious as to if they were turning a blind eye to what would it be happening that. Did no one proactively predict the idea of a black market for alcohol? Like that seems like someone would have been waving their hands saying, “Hey, guys, if you do this, there’s going to be a huge black market for alcohol.”
Jeff Boedges: Al Capone I think did.
Rick Kiley: Well, I don’t think he was like bandying about but I’m just curious before the 18th amendment was passed, were there people who were arguing, saying, “Guys, if you do this, you’re going to create this whole illicit market out here and it’s going to be really expensive to try to enforce what you’re doing.” Like, did that…?
Dr. Mark Thornton: Yes. I mean, the industry itself, obviously, was alert to this problem. And I’ll get back to that but in the past, they only tried local and state prohibitions and these progressive economists thought that if we went nationwide and we could use the Coast Guard around the border of the United States that it would be much simpler to enforce alcohol prohibition than it had been in the past where you could just slip past one county and into another in an unsuspecting truck.
Jeff Boedges: Boy, did we learn our lesson. We never repeat that mistake again.
Rick Kiley: Right.
Jeff Boedges: Yeah. Good learning.
Rick Kiley: Well, the Coast Guard is really good at monitoring that northern Canadian border. You know, they’re really great right in there. Sorry.
Dr. Mark Thornton: Right. And so, you have the industry. You have the brewers who were mostly German, who weren’t very popular people in the United States after World War I.
Rick Kiley: Sure.
Dr. Mark Thornton: And then you have the wineries, which are at the time in Western New York state and in California, very rural, very immigrant-focused, and again, not very popular or well-connected politically, certainly. And then the distilleries are all in Kentucky and Tennessee and places like that. And again, their voices would certainly be heard in the local area, in their state, and their representatives and so forth but they were marginalized by the fact that the production of all these products was generally in rural areas, and then the brewers which the final brewing of the beer was done in urban areas, but again, it was by Germans and nobody was really happy with the Germans in Germany and that reflected badly on the Germans on the German-Americans here.
Rick Kiley: Sure.
Jeff Boedges: Yep. Makes sense.
Rick Kiley: That makes sense. So, okay, then we know that prohibition was repealed, and I guess at what point do you think something changed? What was sort of and from the economist point of view, I guess, when did it become apparent that this is really not working out? It’s costing so much to try to enforce it, we’re not keeping it off the streets, people are still drinking. What sort of threshold was crossed and when? And how did it start falling apart?
Dr. Mark Thornton: Well, in 1930, there was a federal commission, alcohol prohibition, and basically, they found that corruption and bribery was a big part of what made the black market so successful.
Rick Kiley: Makes sense.
Dr. Mark Thornton: They already tried replacing the law enforcement bureaucracy but this really brought it out into the open that there was an inherent problem with trying to enforce alcohol prohibition. And, in addition to that, organizations, pressure groups opposed to alcohol prohibition were organized and began to do their pressure to get prohibition repealed. But the big thing…
Rick Kiley: Because of the corruption? That was the thing?
Jeff Boedges: That was their motivation.
Rick Kiley: What caused them to flip flop, I guess, their motivation to sort of change their viewpoint?
Dr. Mark Thornton: Well, you’ve got the Commission on Bribery and then you have all of the facts of the matter that are showing up in the 1920s in terms of crime, in terms of overcrowding the prisons, in terms of violence, in terms of murder. I mean, basically, in your hometown, you would hear gunshots go off in the middle of the night when you’re in bed trying to sleep. And so, it became more and more apparent, particularly in urban areas, that this wasn’t working out at all but there were saloons everywhere, excuse me, not saloons, but speakeasies, which replaced the saloons. They were actually more numerous than the number of saloons themselves. And so, once people realized that alcohol was actually in some sense, more available even if it wasn’t higher prices…
Rick Kiley: And that was coming along with all this other violence and stuff that made them feel unsafe?
Dr. Mark Thornton: That’s correct.
Rick Kiley: Right. Okay.
Jeff Boedges: At what point though, something we really haven’t touched on here is the tax revenue. So, I mean, there’s one thing to enforce prohibition, but there’s another whole loss, and that’s the opportunity cost of not collecting all the tax revenue on illegal substance.
Dr. Mark Thornton: That’s the very large straw that broke the camel’s back. Alcohol taxes were the second-largest source of government revenue for national state, local county governments. And so…
Rick Kiley: What?!
Jeff Boedges: Yeah.
Dr. Mark Thornton: Yeah. It was.
Rick Kiley: What was number one? Just like personal income tax?
Dr. Mark Thornton: It wasn’t the income tax. Well, yes. Yes, it was. For the federal government, it was the income taxes and for local governments, it was property taxes and to some extent, sales tax and excise taxes. So, the big elephant in the room here is the income tax. So, the income tax starts in 1916. That was an idea that was first put forward by the prohibition party in the 19th century and income taxes became – the revenues grew enormously and that made it possible for alcohol prohibition to be implemented because you no longer needed that revenue source. And so, the income tax, the 16th amendment, essentially opened the door for the 18th amendment to the Constitution, which was alcohol prohibition.
Rick Kiley: So, what you’re telling me is that if we never have prohibition, we would never have income taxes. That’s what I’m hearing. Right?
Dr. Mark Thornton: Well, I’d like that to be the case but…
Rick Kiley: For all our conservative and libertarian listeners out there, just remember…
Dr. Mark Thornton: Yeah. Like I said, the income tax was an idea of the prohibition party in the 19th century. They knew that alcohol taxes were the big source of revenue and that they couldn’t get anything passed unless they replace that revenue. And so, they probably didn’t like the idea of an income tax any more than we do but they saw it as a means to their end. And so, as you fast forward through the 20s, to the early 30s, in 1930, the United States enters the Great Depression and the unemployment rate in 1931 was 25%. And so, government budgets at all levels was in very bad shape and this goes down to even school districts at the local level, not having enough revenues to keep the schools open. And so, city services, governmental services of all kinds were being cut back and there was actually tax revolts in many cities across the United States, particularly, I think it peaked around 1932. And so, all of a sudden, cities, counties, state, and federal governments are all getting a brand new, fresh source of tax revenue and that really alleviated the problems that the tax revolt was creating.
Farmers were being foreclosed on, homeowners were being foreclosed on because they couldn’t pay their property taxes. And so, with the passage of repeal of prohibition, all those revenue sources opened back up again, and the tax revolt melted away, like ice in July.
Jeff Boedges: Like ice in a frosty glass of whiskey.
Dr. Mark Thornton: Yes. And so, we have a real good understanding of these events as we paste these things together. And so, another interesting fact about the repeal of prohibition and the Great Depression was that people who study criminal justice, which includes many different social science disciplines, feel that the business cycle is a major source of crime. So, that if the economy is booming, crime is low, the economy is sinking, crime is high.
Rick Kiley: Right.
Dr. Mark Thornton: Well, the problem with the Great Depression is we were in the worst part of the Great Depression and all of a sudden, crime rates collapsed. Rather than going higher, they went much lower. The murder rate in the United States in the early 1919, 1920 was about five murders per 100,000 citizens. That grew during the 1920s to almost 10 murders per 100,000 citizens in the US. And then in 1933, when alcohol prohibition was repealed, the murder rate came crashing back down to around 5.5 murders per 100,000 people. So, the social scientists to think in terms of the business cycle causing crime were actually very wrong on that point. And our point that prohibition is responsible for crime is super reinforced by the facts around the 18th amendment and the 21st Amendment, which repealed alcohol prohibition really support our case that prohibition is a major source of crime for particularly violent crime.
Rick Kiley: Sure. Well, alright, cool. Let’s then shift into the modern day a little bit. Can we start talking about cannabis? You know, we see, again, you know, we go through this period you mentioned earlier 70s, 80s, 90s, a ton of resources being spent to enforce the war on drugs. We had all those This Is Your Brain On Drugs advertising, all the messaging you even talked about. And this was 50 years after prohibition was repealed. I’m really curious as to if we had this like, I guess, it seems to me not too distant historical example of something that didn’t work. Why we did repeat this same silly mistake again? Did everyone have a short memory? Do they not see the parallels? Like, I don’t know. Can you shed some light on that?
Jeff Boedges: Mostly, did Rockefeller pay to have marijuana illegal?
Rick Kiley: Yeah.
Dr. Mark Thornton: Well, actually…
Rick Kiley: Who paid Nancy Reagan? Like she was up there with Just Say No like what happened?
Dr. Mark Thornton: Well, with the 1937 Marijuana Tax Act which got this whole thing started, it was those B movies, which featured people smoking cannabis and then just going crazy.
Rick Kiley: Reefer madness.
Dr. Mark Thornton: And jumping off of roofs and raping people. It was like a horror movie, basically, and this mysterious substance called cannabis or marijuana was leading the writers to create some really great stories, despite the fact that they weren’t true. And so, the law goes on the books, the tax becomes a prohibition almost immediately as it was interpreted by the bureaucracies. And so, you go into the 1960s and the hippies’ antiwar movement is smoking pot as an act of defiance against the state and against the war. And so, President Nixon declares a new war on drugs, which, unfortunately, got cannabis established as a Class 1 drug, along with heroin, morphine, and the other narcotic type drugs, and basically a Class 1 type drug…
Rick Kiley: Right. That was a Narcotics Act of ‘70.
Dr. Mark Thornton: Yeah. A Class 1 type drug is a drug with no known positive benefits, and at the same time, represents a threat to the health of the individual and others, which is a complete misclassification but that roped, no pun intended, cannabis in with these other drugs. And of course, the fact that the market for cannabis is many times that of any of these other drugs at the time really caused the enormous explosion in the war on drugs. The amount of resources that were necessary, the number of people who are incarcerated, the number of people had to go through the criminal justice system, millions upon millions of people removed from their prime economic earning ages, and all the other social side effects that have taken place that we have witnessed as a result of the war on drugs. So, if the war on drugs did not include cannabis, the negative effects of the war on drugs would be much more limited than they are today because as we see today, people are substituting cannabis for a variety of other drugs such as tobacco and alcohol, but also pain medications, such as oxycodone and Vicodin. They’re able to wean themselves off.
And so, there’s a great substitution effect here, where people are substituting in cannabis for alcohol, tobacco, on the one hand, prescription painkillers on another, and also psychoactive prescriptions, as well. So, not surprisingly, you have the alcohol, tobacco, and pharmaceutical companies paying money to try to fight these legalization efforts within the states.
Rick Kiley: Right. So, more lobbying, more super PACs. It’s interesting, the idea of like Nixon wanting to vilify cannabis, because it’s seen as like, not supportive of like the military-industrial complex. It’s like I hadn’t thought about it that way, either. That’s just an interesting thought as well. I’m curious, in this like time period, though, we’re at least like the economists, those who once upon a time maybe were saying, “Hey, a prohibition if put in place on a federal level could have a positive impact,” like, had they changed their view? Were they mostly on the side of decriminalization and legalization? Or were there some that were sort of toeing the line with what the federal government was saying?
Dr. Mark Thornton: Yeah. When you get into the 1960s, you see economists starting to do research on illegal drugs. And the mainstream economists of the time were in favor of decriminalization and high excise taxes. So, you would discourage consumption in that way rather than an outright prohibition. And the reason they did that and this was clever is that they hypothesize that illegal drugs were addictive, and therefore the demand was inelastic and therefore, if you put pressure on the supply side, you raise the price a lot so you raise the profits of the black market. But because demand is inelastic then it means you don’t really reduce consumption by very much. And an analogy here would be to cigarettes or tobacco, which are addictive so that if the government increases the excise tax on cigarettes, the price goes up by the full amount, but the quantity demanded by addicted cigarette smokers doesn’t decrease by very much.
And so, they saw prohibition as helping the black market without really achieving much in the way of social goals and so they advocated a decriminalization approach, along with high excise taxes. In more recent decades, the Austrian School of Economist, which is not really a mainstream part of economics in the universities today were a more traditional approach to economics based on logic rather than on econometric models and so our group is based…
Rick Kiley: Those two things are different?
Dr. Mark Thornton: What’s that?
Rick Kiley: I mean, the logic.
Jeff Boedges: Econometric…
Rick Kiley: I was just like logic and the econo… I would think they sound very similar to me. Can you tell me how they’re different?
Dr. Mark Thornton: Well, yeah, there’s obviously logic being used on in both camps of the mainstream economist and Austrian School economist but it’s a really entire different methodology. We stick with economic theory, first and foremost, where they’re positivist or empiricists, and so they let the facts sort of make their decisions for them, but the facts can be very misleading or hard to interpret and things along those lines. But the Austrian School of Economist, I did a paper on this where I looked at everybody in the economics profession who had a written professional opinion on prohibition policy regarding the war on drugs and the Austrians basically came across as pro-legalization of drugs, whereas the mainstream economists, including economists of the Chicago School, basically, they felt favor this approach where they decriminalize it to save money, and then they put an excise tax on it to generate tax revenues that can then be used to try to have government employees solve the addiction problem. And we don’t see that as really a viable alternative, although it certainly beats outright prohibition.
Rick Kiley: Okay. Is there a clarification? How do we understand the distinction between decriminalization and legalization? So, I understand what you’re saying about, you know, the excise tax and removing sort of the prohibition, but can you help us differentiate those two things?
Dr. Mark Thornton: Sure. Decriminalization a good example of that is in the country of Portugal, where in 1997 they decriminalized all drugs and, basically, that meant that you were free to consume everything from cannabis to heroin. And if you were apprehended, you might be taken into custody and you might be given a small fine or have to attend some lectures but you weren’t going to go to prison for it.
Jeff Boedges: You got a very stern talking to and they took you back.
Dr. Mark Thornton: In the production and distribution of these drugs is still illegal. So, it’s a halfway house, no pun intended, between legalization where you can go in and buy cannabis in a local store.
Rick Kiley: No, I think that’s clear. That’s great. Thank you so much. So, fast-forward to today, we’re finding ourselves at this point where it seems that public opinion is definitely moving much more towards acceptance of cannabis, that it’s not only bad for you as you would say it and deserving of a Schedule 1 sort of rating. And we’re well along the path of legalization, we got medical programs in nearly every state and there I think 11 states that have recreational programs that are allowed. From your perspective, are you watching this at all? Do you think that the states that are legalizing are they finding the right balance between an oversight for public health and still enabling, I think, as much free-market growth as is allowable?
Dr. Mark Thornton: Well, first, the ideological issue in 1972, only 12% of Americans supported outright legalization of cannabis and probably most of them had smoked cannabis as part of the…
Jeff Boedges: Right before being surveyed. “What was the question again?”
Dr. Mark Thornton: And so, that has been creeping up slowly. In the 1990s, it starts to gain some headway and so the ideological change here is certainly in a positive direction. More recently, 60% of Americans support legalization of cannabis. Something in far excess of 80% supports medical cannabis. And so, there’s been an ideological switch and all demographic groups now, with the exception of the elderly, support legalization and so going forward, it’s a bright story. What’s the second part of the question about…?
Rick Kiley: Well, from an economist point of view, we see, I don’t know, if you’re watching what’s happening in these markets today. It’s very interesting. We have medical programs. We have recreational adult-use sort of legalization in some states. Do you think that the rules are being put in place in a way that will allow this the cannabis market to grow in sort of a free market way and the way that most products can?
Dr. Mark Thornton: The stringency of the intervention by the state governments varies from state to state. This involves getting licenses to sell, getting licenses to grow, taxes on production, taxes on consumption, and then harm reduction policies, public education programs. So, it does vary from state to state but I would generally classify most of the states as pretty restrictive and so that even though these markets are growing very rapidly and generating lots of tax revenue, because of the high taxes and regulations, they’re keeping the black markets alive. And so, in Colorado, where things are fairly free, the black market is almost at last count almost half of the entire market. So, states are going to learn to remove the restrictions as they become comfortable with a new setting and as more and more states legalize, then they’re going to have to worry about cross-border competition, people in one state trying to avoid their high cannabis taxes by buying in other states.
So, I have a feeling that not only are we moving in the right direction but that at the local levels, these organizations are going to have more knowledge, they’re going to learn from their errors, and they’re going to be forced to move in a positive direction of being less interventionists because these industries in certain states are going to be very large and becoming increasingly influential, increasingly a source of good-paying jobs. And so, as a result of state-by-state competition, I expect everybody to move in the right direction and make improvements of these industries. When you think about what cannabis and hemp can be used for, I mean, it’s just enormous. You talk about food, you talk about drugs, you talk about medicines. I mean, you talk about even with hemp, you could make that into paper, you can make it into building materials, plastics. And so, it’s really like oil in many respects. Cannabis is a master ingredient. In other words, it can be possible that it’s economically beneficial to use those base materials in industries across the economy.
Rick Kiley: Put it in your car, like that’s the question.
Jeff Boedges: You can, in the glove box. Just make sure it’s in an unmarked package.
Rick Kiley: I’m curious, though, you mentioned the restrictions that are keeping the black market alive. Do you think that these are state-level restrictions or do you think that the fact that it’s classified illegal on a federal basis is that really the driving factor that’s keeping the black market alive in these states?
Dr. Mark Thornton: Well, the Federal prohibition on cannabis is suppressing investment in these industries in terms of growing cannabis, in terms of refining it into various products, and then in terms of setting up retail operations. It’s suppressing investment in those areas. But I’m actually hoping that someone dumb like my former senator, Jeff Sessions, would actually get to try to suppress some of the states with the federal law, because basically, what I would expect is that what the people in these states have done is that they’ve basically turned their backs on federal government law and international law and they’ve stood up and told these meta-organizations that we don’t care what you think. So, if the federal government came into the states where it’s been a very successful transition, everybody, including people who are against it are now for it, if the federal government comes in and starts arresting the guy at your local cannabis shop or the farmer who’s growing it or the company that’s refining it into all sorts of medical and non-medical uses, I think the people will stand up at that point in that state.
And whoever the feds try to arrest and try in court that jury nullification will come into play and that the local juries won’t convict people who have been arrested for violating the federal law. And that would be the worst thing possible for federal power or federal state power with the people openly, basically…
Jeff Boedges: Thwarting the will of the national government.
Dr. Mark Thornton: Yeah. I mean, this would be a terrible blow to federal power and that’s why I think they’ve avoided allowing people like Jeff Sessions to do that. And Obama had the same problem and even George Bush had this problem too where you had elements within the government, specifically the Attorney General, in the case of Obama and in the case of Trump, and then you had elements within the Bush administration that wanted to do it as well, most of the neoconservatives and they were told to back off because this could blow up in their face. What you think you might be able to accomplish is probably going to be exactly wrong.
Rick Kiley: Yeah. The NSA has been on the line the whole time. I think we’re actually getting towards the end here so I think we can wrap up by just saying we’ve been talking about legalization a little bit, and some of the restrictions that are keeping black market alive. And I’m curious, from your vantage point, do you think that the Federal legalization is coming? Do you think we’re headed that way? And if so, do you have an over-under on the timing?
Dr. Mark Thornton: I think we’re very close. One of the things that make me think so is this business of scheduling drugs and the fact that cannabis is in the hardest possible classification. I know that several federal judges have been looking at this, so an opinion could be issued tomorrow, which would effectively end the war on cannabis and I think we’re going to see continued progress in the upcoming elections in terms of medical and recreational marijuana. I think, ideologically, the country’s definitely going in for this, and it’s probably going to happen in the next few years. A lot of it will be determined by what the federal government looks like in terms of parties after the 2020 election. If it’s a complete democratic sweep, that increases the odds of federal legalization and, of course, the federal government would want to get on the tax revenue bandwagon as well.
Rick Kiley: Okay. That’s that again.
Jeff Boedges: Yeah. You don’t think it becomes a bargaining chip for the 2020 elections? You don’t think people may try and coop that on either side of the aisle?
Dr. Mark Thornton: Yes, but it’s a tricky subject. I think you can do that at the local level. I think that, for example, here in Alabama, being pro-legalization would count against you at a local election where the citizens who vote that would be a turnoff for them in the local elections, but on a national scale, I think it’s less of a bargaining chip. And so, I think it’s going to continue to influence state and local federal elections, and in this race, but I think that neither side really is going to be coming forth. For example, Joe Biden is not a pro-legalization guy at all. He’s a tough law and order guy. So, if he’s the Democratic nominee, it’s not going to be an issue. Donald Trump has said positive things about this and he’s prevented Jeff Sessions from intervening in states. But I doubt that he’s going to want to make that part of his campaign given his campaign base, probably would, in large part, not support that at this time. But going forward in time, there’s no question that as we get politicians from legalization states in these large presidential elections, it’s definitely going to be a tipping point and it’s definitely be coming pretty soon.
Rick Kiley: Got it. So, we read about potentially a recession coming. It was interesting to note prohibition being repealed was sort of coinciding with the Great Depression and the tax revenue was attractive. Do you think that if we do tip into a recession, that might accelerate the federal government’s desire to sort of capture some of that revenue?
Dr. Mark Thornton: No question about it. I think we’re headed for a recession in the short run and then it’s going to be very severe. It’s going to be the type of contraction in the economy where revenues are definitely going to be a source of problems for all levels of governments. And so, that’s going to be the biggest part of the tipping point and I expect that to happen in 2020. So, it really creates a lot of wild cards for that election in November of 2020. The confluence of events in the economy and within the democratic process, it’s going to be a very interesting year.
Rick Kiley: On that note, I’m really looking for someone that says, “There’s not going to be a recession.”
Dr. Mark Thornton: Well, I have a book out recently called The Skyscraper Curse, where the building of the world’s tallest skyscraper is a prelude to a world economic crisis. And there was one that was supposed to be scheduled to be completed in 2020 so it looks like and, in fact, we are already seeing signs of real difficulties in the economy and difficulties with monetary policy and I see them as preludes to a big crisis.
Rick Kiley: Yeah.
Jeff Boedges: I would throw in the political insecurity for just about most of the well-developed Western nations right now. That’s definitely not filling people with a lot of optimism.
Dr. Mark Thornton: Confidence.
Jeff Boedges: Yeah.
Dr. Mark Thornton: Yeah.
Rick Kiley: Yeah. Confidence is important. Well, Mark, it has been great talking to you today. We really appreciate you taking your time. If someone wants to learn more about you, read some of your work, where should we tell them to go?
Dr. Mark Thornton: Well, you can google my last name. I’m on Wikipedia. But the source of where most of my writings are is on the institute’s web page and that’s spelled M-I-S-E-S dot O-R-G and we have lots of daily articles, we have four different podcasts, we have all the books of the Austrian tradition available for free, PDF downloads, we have audiobooks. The materials and our programs are something I think all of your audience would be interested in becoming knowledgeable and so I encourage everybody to go visit, sign up for things. It’s all available for free with no registration 24/7, 365.
Jeff Boedges: Fantastic.
Rick Kiley: Awesome. Thanks so much. That’s Mises.org. We were talking to Mark Thornton today. Thanks so much, Mark.
Dr. Mark Thornton: You’re welcome. It was great. I had fun.
Rick Kiley: Cheers. All right. Bye.