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Prohibition and the Economists

Mises Daily: Saturday, September 16, 2006 by

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[This article is excerpted from The Economics of Prohibition.]

Economists and Prohibition

"I hold that there is nothing much wrong with standard economic methodology as laid down in the first chapter of almost every textbook in economic theory; what is wrong is that economists do not practice what they preach." — Mark Blaug, The Methodology of Economics

Since economists have been leading the battle against drug prohibition, most people would be surprised to learn that they played an important role in establishing and defending the alcohol prohibition of the 1920s. It is still an open question whether economists set public opinion or mirror it, but the relationship between economists and prohibition provides interesting insights into the economics profession, the origins of Prohibition, and the current debate over drug legalization.

In recent years economists have led the fight to legalize — actually, to relegalize — drugs. The Nobel Prize-winning economist Milton Friedman has been the outspoken leader of the relegalization forces. His open letter to "Drug Czar" William Bennett, published in the Wall Street Journal, is just his latest salvo against the prohibitionist establishment.[1] Friedman began this battle in the 1960s, writing in Newsweek that the prohibition of drugs was ineffective and that more reasonable and prudent approaches to the problems of drug abuse were available. He (with his wife, Rose Friedman) later attacked drug prohibition in Free to Choose and The Tyranny of the Status Quo, linking the harm it causes with the experience of alcohol prohibition in the 1920s. The Friedmans are careful observers of history who oppose drug prohibition both on ethical and practical grounds.

"Prohibitions have no socially desirable effect."

One of Friedman's former colleagues at the University of Chicago, Gary S. Becker (1987), has also come out strongly against drug prohibition in the popular media. His support for the relegalization of drugs is significant because of his status in the profession, and for his potential as a Nobel Prize winner in economics. Becker argues that prohibition is not working and that the costs far outweigh the benefits. He bases his position both on current findings and on his own theoretical research. Becker is the foremost current authority and advocate of the rationality assumption regarding the study of human behavior. Among his numerous articles on the economics of human behavior is his recently published "A Theory of Rational Addiction" (with Kevin Murphy), in which addiction is modeled as rational behavior.

Another important economist to announce support for legalization is the former secretary of state George Shultz. Since Shultz was a key member of the Reagan administration, his public statement is a major development in the debate over drug policy. The pro-legalization position of William F. Buckley, Jr., and Shultz's conversion to legalization mark a major turning point in conservative thought.

A survey of economists indicates that the majority oppose prohibition and favor moving policy in the direction of decriminalization. Economists who specialize in monetary theory and public finance are more likely to support decriminalization, while specialists in business administration are more apt to defend prohibition. Economists who work in the private sector generally support decriminalization, whereas government economists are more likely to support prohibition. It should be noted that economists overwhelmingly fall within the demographic grouping that exhibits the most support for legalization within the general public (middle aged, male, highly educated, upper income, Jewish or nonreligious). Most graduates of the top graduate programs and most economists trained in the Chicago, public choice, or Austrian traditions supported decriminalization of illegal drugs (Thornton 1991).

The growing importance of and interest in prohibition has led some economists to include discussions of laws against alcohol, drugs, gambling, and pornography in their textbooks. Normally restrained and politically neutral, several writers of economic textbooks have taken a skeptical view of all prohibitions. For example, when examining the current drug prohibition, Edwin G. Dolan and John C. Goodman (1989, 35) present "misgivings raised on grounds of efficiency, equality, and liberty." Robert B. Ekelund and Robert D. Tollison (1988, 108) find that "(e)conomic analysis casts doubts on the effects of directing increased resources into enforcement without careful analysis of the probable consequences of such programs;" and they suggest "that government expenditures would be better directed to the demand side of the problem."[2]

Richard McKenzie and Gordon Tullock (1989), too, place a warning label on prohibition. They find that "the costs of enforcement should, perhaps, be taken into account now in evaluating the efficacy of contemporary laws against hard drugs or pornography" (7). McKenzie and Tullock also assert that economists have always been in agreement against prohibition and have been aware of the tremendous costs, as if alerted by some standard economic model: "If backers of prohibition had consulted economists, we are sure they would have been told that the law would be very difficult and expensive to enforce. With this advice they might have decided not to undertake the program of moral elevation" (7; emphasis added).

It is true that economists were in substantial agreement during the formative years of national alcohol prohibition. But they were for it — not against it.

The Origins of the "Economics" of Prohibition

Economists helped establish the case for prohibition during the Progressive Era, a time when they were professionalizing their discipline and when a movement toward government interventionism and socialism, promoted by the German Historical School, was displacing the classical liberal approach to political economy. Members of the German Historical School rejected economic theory in favor of the study of history and institutions. Derived from German romantic philosophy (Hegelian determinism) the School advocated the use of laws as a means to social reform.

Graduates of the German Historical School, principally Richard T Ely, founded the American Economic Association in 1890. The association was modeled after German academic associations that allied themselves with the German state. Many market-oriented economists threatened to boycott the new organization because of its outwardly political bias. Once its socialistic statement of principle was dropped, however, the association became widely accepted.

"To the extent that prohibitions result in increased prices, they produce increased crime and political corruption — and the innovation of more dangerous substitutes."

Many of the founding members were raised in puritanical households of postmillennialist pietism.[3] During their days as university students many became atheists, substituting a secular approach to perfectionism for the religious approach of their parents. Some, such as Richard T Ely, adopted a prosocialist orientation, while others, such as John Bates Clark, adopted a "dog-eat-dog" evolutionary perspective on capitalism. What they shared was an evangelical outlook and a strong dislike of such products as alcohol.[4]

One of the founding members of the association and a leading proponent of prohibition was Simon N. Patten. Patten was a misfit. Handicapped by poor health and eyesight, he was unsuited for traditional pursuits and was considered the oddball of his prosperous family. Born into a traditional Yankee puritan home, Patten became an intellectual and agnostic. After several setbacks in his life he went to Germany, where he was trained by a leader of the German Historical School, Karl Knies. Upon returning to America he could not find a job until he was hired by fellow supporters of protectionism and friends at the Wharton School of the University of Pennsylvania.

A. W. Coats (1987) describes Patten as original and idiosyncratic, his publications unusual and eccentric. Patten's contributions "were intriguing but puzzlingly novel and unsystematic, yet his awareness of the costs of growth and his concern for the environment anticipated late 20th century anxieties" (818-19). Despite extensive writings and his role as a founder (and later president) of the American Economic Association, Patten is remembered not for his theories but for his "prophecies."

One such prophecy was the advent of alcohol prohibition in America. Patten was a pluralist, believing that a policy is neither all good nor all bad and that a policy may very well be good for one country but disastrous for another. He wrote in 1890 that alcohol prohibition was a good policy for America and that abstinence would be the inevitable result of evolutionary competition.

Prohibition was both desirable and inevitable in America from Patten's evolutionary perspective. Patten based his conclusion on three main factors:

  1. severe weather variation in America results in heavy and irregular alcohol consumption;
  2. the custom of "treating" in America results in people consuming a greater quantity and variety of alcoholic drinks than if they relied solely on their own decisions;
  3. technological advance resulted in the production of higher-potency and lower-quality alcoholic beverages.
All three of these conditions were relative to conditions in Germany, where Patten was trained and where prohibition was apparently unnecessary.

Patten seems to argue that prohibition must be adopted if we are to "survive." Temperate people will "outcompete" heavy-drinking societies in terms of longevity, prodigy, and wealth. Temperate societies will overcome the intemperate because a given amount of land can support two temperate people or one heavy drinker. America will decline as the soil is exhausted in an attempt to support a nation of drunkards. For Patten, prohibition is a great evolutionary battleground because America must go dry if it is to survive and prosper:

Separate out the good in society from the bad, and you take from the bad many of the restraints which keep them from crime. In this way every measure that makes the good better makes the bad worse. The sharper the lines are drawn between the two classes, the more will the good progress and the quicker will the bad run through their downward course. With prohibition it is easier to be good and more dangerous to be bad. (1890, 65)

For Patten, alcohol is a product with no equilibrium in consumption. One is either good and abstains from alcohol, or one becomes a drunkard and self-destructs. Patten even presented an early version of the escalating drug-use theory (that is, marijuana use leads to heroin addiction) when he referred to

that graded series of drinks found in every saloon by which the drinker passes gradually to stronger drinks as weaker ones lose their attraction. This tendency divides society into two parts, and forces the respectable to join in a compact opposition to all drinking. The sharper this contest becomes the more have the abstainers to gain. Little by little will their economic advantage increase their strength, until their moral influence will keep the drinker from the saloon and their political power will take the saloon from the drinker. (1890, 67-68)

Patten links virtually all the problems of modern society (real and imagined) with drunkenness. His obsession with drunkenness is indicated by his somewhat confusing concluding statement of his first English publication:

The increase of drunkenness and other physical vices which have accompanied modern progress are the result of the extended division of labor, which destroys the ability both to produce and to enjoy most of those things that are sources of pleasure to man in an isolated state. We can obtain the advantage derived from the division of labor without losing the ability to enjoy all kinds of produce only by so educating all the faculties of man that he will have that independence and all those sources of pleasure which isolated men enjoy. Moreover, those qualities which increase the sources of pleasure are the very ones by which the field of employment is enlarged and the tendency to overpopulate is reduced, and only when education has developed all the qualities in every man can we expect this tendency to become so harmless that all men can enjoy the pleasures of an isolated state along with the efficiency of modern civilization. The End. ([1885] 1968, 244)

On this argument, Patten formed the economic rationale for prohibition and helped set the alcohol agenda of American economists. Like William Graham Sumner and John Bates Clark, he perceived that survival of the fittest would eventually eliminate the drunkard from society. The interventionist bias in his education, however, propelled Patten to conclude that prohibition combined with evolutionary competition would achieve the desired results (total abstinence) much quicker than evolution alone.[5]

In Defense of Prohibition

An important American economist, Irving Fisher, was the champion of Prohibition within the profession. He organized a round-table discussion on the topic at the American Economic Association meetings in 1927. Here he claimed to have been unable to find even one economist to speak against Prohibition, despite a thorough search.

I got a list of the economists who are supposed to be opposed to Prohibition, and wrote to them; they all replied either that I was mistaken in thinking that they were opposed to Prohibition or that, if we were going to confine the discussion to the economics of Prohibition, they would not care to respond. When I found that I was to have no speaker representing the opposite point of view, I wrote to all American economists listed in "Minerva" and all American teachers of statistics. I have not received from any one an acceptance. (I. Fisher et al. 1927, 5)

Contrary to the belief of McKenzie and Tullock, if the supporters of alcohol prohibition had asked economists about it, they would have been heartily encouraged.

In 1926 Fisher conveyed an optimistic, almost utopian view toward the elimination of the poisonous drink and the problems often associated with alcohol consumption. The 1920s was a time of great optimism, and Fisher best described the optimism concerning Prohibition:

Prohibition is here to stay. If not enforced, its blessings will speedily turn into a curse. There is no time to lose. Although things are much better than before Prohibition, with the possible exception of disrespect for law, they may not stay so. Enforcement will cure disrespect for law and other evils complained of, as well as greatly augment the good. American Prohibition will then go down in history as ushering in a new era in the world, in which accomplishment this nation will take pride forever. (I. Fisher [1926] 1927, 239)

Fisher's staunch support of Prohibition helped to insulate the policy from criticism. He wrote three books on Prohibition in which his academic status and objectivity thinly cloaked his avid support.[6] He promoted the claims that Prohibition would reduce crime, improve the moral fabric of society, and increase productivity and the standard of living. Indeed, he maintained that Prohibition was partly responsible for the economic prosperity of the Roaring Twenties.

Fisher, a genius in many respects, was born into a Protestant family of Puritan stock. His father was a preacher and a graduate of Yale Divinity School, and his mother was at least as zealous as his father. The death of his father and two older siblings, as well as his own poor health, had a major impact on his views concerning social policy. He supported anything, such as Prohibition, that might extend life expectancy.

"History reveals that prohibitions are indeed classic examples of the co-opting of public-spirited intentions by rent seekers within the political process, thereby explaining the existence of what at first appears to be irrational policies."

Fisher's atheism would appear to place him at odds with religious reformers, the principal supporters of Prohibition. Still, though Fisher gave up belief in God and religion, he remained convinced of the doctrines and methods of postmillennialist evangelical Protestantism. Men should work toward the goals of morality, progress, and order while on this earth, he believed, and government should be the main instrument of civilization. Method was secondary to achieving desirable ends. This outlook would typify his work in economics and social policy. "Men cannot enjoy the benefits of civilized liberty without restrictions. Law and Order must prevail, else confusion takes their place, and, with the coming of Confusion, Freedom vanishes" (quoted in I. N. Fisher 1956, 13).

Fisher was most adept at mathematics and helped support himself through scholarships, academic contests, and tutoring. His dissertation was an exercise in a mathematical-theoretical reconstruction of utility theory that drew heavily on the method of Leon Walras.

The thesis was applauded by Francis Yisdro Edgeworth, who repudiated aspects of his own theory after reading Fisher's work. Vilfredo Pareto wrote Fisher an eight-page letter in which he spoke scornfully of the "adversaries of mathematical methods;" and praised Fisher's distinction between utility of "that which cannot be useful, and that which is really useful."[7] It was this distinction that Fisher used later in the analysis of alcohol consumption.

To admirers of Fisher's more scientific contributions, he appears eminently scientific and objective. His work on Prohibition reveals a thin layer of scientific veneer that is important for evaluating all his contributions, for Fisher was clearly an advocate of government intervention in the economy. A key insight into his viewpoint is illustrated by an excerpt from his speech to the Yale Socialist Club in November 1941.[8]

I believe [William Graham Sumner] was one of the greatest professors we ever had at Yale, but I have drawn far away from his point of view, that of the old laissez faire doctrine.

I remember he said in his classroom: "Gentlemen, the time is coming when there will be two great classes, Socialists, and Anarchists. The Anarchists want the government to be nothing, and the Socialists want government to be everything. There can be no greater contrast. Well, the time will come when there will be only these two great parties, the Anarchists representing the laissez faire doctrine and the Socialists representing the extreme view on the other side, and when that time comes I am an Anarchist."

That amused his class very much, for he was as far from a revolutionary as you could expect. But I would like to say that if that time comes when there are two great parties, Anarchists and Socialists, then I am a Socialist. (Quoted in I. N. Fisher 1956, 44)

Fisher's initial position on alcohol problems was that education of the youth was the best solution. Alcohol had its grip on drinkers, just as opium had its grip on dope fiends. The older generations would have to be forgotten, with all efforts concentrated on the youth. In an address to the students of Oberlin College in the spring of 1912, he summarized his position on intoxicants: "But what is the normal use of these things (beer, whiskey, opium, hashish, and tobacco)? According to the best light scientifically that has been shed on them, the normal use is none at all, and if that is so those who see it should not be ashamed to live up to their ideal any more than they should be ashamed to live up to the Ten Commandments" (quoted in I. N. Fisher 1956, 152-53).

"One early lesson from American history is the unmistakable interaction between war, intemperance, and prohibition."
In testimony before the Subcommittee on Excise and Liquor Legislation for the District of Columbia (1912) he stated: "After making what I believe was a thoroughly disinterested study of the question, … I came personally very strongly to the conclusion, on the basis of statistics as well as on the basis of physiology that alcohol so far as we can observe its effects, is an evil and no benefit" (quoted in I. N. Fisher 1956, 153-54). Later he became convinced that antisaloon legislation would be necessary to supplement education efforts, and he was converted to prohibition by the "success" of state prohibitions.

During World War I, Fisher volunteered his services to the Council on National Defense, where he was assigned the task of establishing wartime policy on alcohol. Under his direction the council recommended wartime prohibition and dry zones around all army cantonments. The alcohol interests blocked the first measure, which Fisher supported because he considered the war an excellent opportunity to experiment with prohibition. Fisher also surmised that this defeat provided the necessary impetus to bring about prohibition in 1920.[9]

It was as an indirect result of this second defeat of War-time Prohibition that Constitutional Prohibition came about! The brewers found that, unwittingly, they had jumped out of the frying pan into the fire! The reason was that the Senators who had acceded to President Wilson's request to withdraw the War-time Prohibition clauses from the Food Act thereby so disappointed and angered their dry constituents that these Senators felt constrained to do something to set themselves right. (I. Fisher 1927, 10-12)

Fisher's books on Prohibition are empirical examinations of social statistics such as alcohol consumption, criminal activity, and health. In his first book, Prohibition at Its Worst (1927), Fisher spoke for himself and was the most confrontational. In Prohibition Still at Its Worst (1928) and The "Noble Experiment" (1930), he replaced this style with a seemingly more balanced approach in which he presented both "wet" and "dry" views on various issues and empirical points.

"Prohibitions on drugs cause potency to increase."

In the first book, Fisher laid out his assumptions, or "great facts" which constituted his general plan of analysis. He purported to show that Prohibition was imperfectly enforced, that its results were not as bad as reported, and that it had in fact accomplished much good. He found the personal-liberty argument against Prohibition an illusion. Further, he argued that the Volstead Act could not be amended without violating the Eighteenth Amendment, that the Eighteenth Amendment could not be repealed, and that its nullification would be the worst possible disrespect of the law. Finally, he asserted that the "only practical solution is to enforce the law" ([1926] 1927, 18-19).

Much of Fisher's work involves disputes over statistics. Still, he can be credited to a large extent with developing the major issues concerning prohibition, organizing the debate between wets and drys, and establishing the criteria by which future prohibitions would be judged. A detailed examination of Fisher's work on prohibition would take a book-length treatment in itself. A critique of some of Fisher's conclusions and suggestions, however, provides a sampling of his shortcomings.

Fisher apologized in later writings for failing to recognize the merits of private prohibition. Before the turn of the century, employers commonly supplied employees with alcohol rations on the job. After 1900, most manufacturers, with their complex and dangerous production processes, did away with alcohol rations, often replacing them with rules against drinking. These changes occurred at a time when courts and state legislatures were increasingly holding employers responsible for injuries to employees.

Fisher seemed puzzled by the distinction between public and private prohibition and by "wet" support for private prohibition but not for that decreed by the government. The fact that changes in the economy made private prohibition economical for some employers seems lost on him. He later admitted that private prohibitions were more effective than the law. "Largely because of the penalties of the workmen's compensation and employers' liability laws, and from considerations of output requirements, the situation has brought about a more absolute form of Prohibition, privately enforced, than that embodied in the Eighteenth Amendment or the Volstead Act" (I. Fisher 1930, 443). This not only indicates that Fisher was in part blind to the market process, it also undermines the empirical analysis throughout his work and that of others. The desirable results of private prohibition and employment policy cannot be attributed to Prohibition.

Fisher felt that public opinion was firmly behind Prohibition because of the increased mechanization in society. He contended that machinery and automobiles could not be safely used after one consumed alcohol. This argument, however, is no better than arguing for a prohibition of cars without considering the costs involved and alternative solutions. Fisher also argued that other systems, such as the ones adopted in Canada (government dispensary) and Great Britain (taxation and regulation), were worse, or at least no better, than Prohibition. Here he was comparing his perceptions of what foreign systems were like in practice with his perception of what American Prohibition would be like if it were "properly enforced."

Fisher argued that consumption of alcohol declined during Prohibition, and several estimates support the view that alcohol consumption per capita did decline. Still, many important questions — how much did consumption decline? what were all the causes for this decline? how did individual consumption patterns change? what type of alcohol was consumed? and what happened to consumption of substitutes? — remained largely unanswered and even unasked. He also contended that the decrease in alcohol consumption fostered economic progress. Although the claim that Prohibition had caused the economic prosperity of the 1920s was discarded with the onset of the Great Depression, his beliefs concerning industrial productivity and absenteeism are still used to inflate estimates of the economic losses from drug use and the potential benefits of prohibition.

In discussing the substitutes for alcohol, Fisher focused on the automobile, radio, and motion-picture industries. In a passage that reads more like a sermon than a tract on economics, he noted that the increased specialization in the economy (apparently also a contribution of Prohibition) allowed for the relief of misery. He considered all substitutes for alcohol as good, and he completely ignored the fact that such substitutes generally resulted in less value for the consumer and might result in a type of substitute that Fisher himself would lament. According to the limited references to narcotics in his writings, Fisher apparently thought that Prohibition had reduced the sale of narcotics and that they might not be as damaging as alcohol.

Fisher felt that Prohibition had worked better than could be expected "hygienically, economically, and socially." The main problem was that it was poorly enforced, particularly in the big cities. He claimed that Prohibition worked where it was properly enforced. Fisher supported a complete reorganization of enforcement at all levels, the hiring of better enforcement officials, and large increases in expenditures on enforcement.

Fisher seemed puzzled by the distinction between public and private prohibition and by "wet" support for private prohibition but not for that decreed by the government.

In his final contribution on Prohibition (1930), Fisher uncharacteristically compromised with the wets by supporting the "right" to home production and consumption. He claimed that legalizing home production would reduce the requirements on law enforcement and eliminate the personal-liberty argument from the public debate. It is unclear whether Fisher used this as a last-ditch effort to save Prohibition or if he realized its futility. He admitted that such a modification would decrease the number of opponents of Prohibition by "thousands, if not millions" and would allow law enforcement to concentrate on bootleggers without compromising the closure of saloons. He also made one statement admitting the infeasibility of prohibition: "Yet, it is absurd to expect home production to be prevented by enforcement officers" (1930, 454). Both the admission of the infeasibility and the compromise are unique statements from Fisher, and they appear only on the last page of his last book on Prohibition.[10]

Fisher's methodology was poorly suited to a proper assessment of prohibition, particularly when combined with his religious-like zeal to eliminate the use of alcohol and to increase life expectancy. In theoretical matters, Fisher began with the distinction between desires (demand) and attainment of actual satisfaction. His personal impatience, his concern over mortality, and his interest in eugenics and genetic engineering may have contributed to his distinction between desire and attainment of value.

One of the points which I look back upon with satisfaction is that I repudiated the idea of [William Stanley] Jevons that economics was concerned with a "calculus of pleasure and pain" and I insisted there was a great distinction between desires and their satisfactions and that economics had to do only with desires, so far as the influence of market prices was concerned.

But one should be more interested in truth than in who desires the credit for first reaching it. Ever since my six years of illness I have become much more interested in promoting the truth than in claiming credit or even in adding to knowledge. There is so much knowledge already attained that is not yet applied that I have often set myself to work to bring that knowledge to the attention of others.

Today I would like to see a study, partly economic and partly psychological, showing how the human animal following his desires often misses satisfactions instead of attaining them. The star example is narcotics. (Quoted in I. N. Fisher 1956, 339)

No matter how real or important the distinction between desire and attainment of satisfaction is, economists such as Joseph Schumpeter have found that in Fisher's case "the scholar was misled by the crusader." Or as G. Findly Shirras noted, "The drawback to a completely rational mind is that it is very apt to assume that what is flawless in logic is therefore practicable" (quoted in I. N. Fisher 1956, 193-94).

Fisher was much more apt to rely on "facts" and available statistics than on the logic of cause and effect. In the preface to The Making of Index Numbers, he illustrated his reliance on statistics and the inductive method by noting: "The present book had its origin in the desire to put these deductive conclusions to an inductive test by means of calculations from actual historical data. But before I had gone far in such testing of my original conclusions, I found to my surprise, that the results of actual calculations constantly suggested further deduction until, in the end, I had completely revised both my conclusions and my theoretical foundations" (quoted in I. N. Fisher 1956, 194-95). This illusion of facts hampered Fisher's work on index numbers, monetary theory, and proposals for monetary reform, as well as his understanding of the "new economic era" and Prohibition. A colleague of Fisher's at Yale, Ray Westerfield, developed this and other related points in a memorial article.

Fisher was never content to stop with scientific research; he was imbued with an irresistible urge to reform, along lines indicated by his studies. For example, having seen and felt the evils of unstable money and having discovered the causes and cures, he was determined to do all he could to make it stable.

Unfortunately his eagerness to promote his cause sometimes had a bad influence on his scientific attitude. It distorted his judgement; for example, he was carried away by his "new economic era" ideas in the late 1920s and lost his fortune…. He relied upon concomitancy too much in his belief that the stability of the price level from 1925 to 1929 was due to Federal Reserve action and refused to give due recognition to other factors at work. (Quoted in I. N. Fisher 1956, 193)

Fisher's conclusions and convictions guided the statistical studies that gave him faith in the attainment of his goals in matters of monetary policy and prohibition. The fall of Prohibition at the bottom of the Great Depression must have made for dark days for this well-intentioned reformer. He retired from academic life shortly thereafter but continued as an active reformer and contributor to public debate.

Prohibition's Blue Monday

While Fisher was beginning to realize some of the negative consequences of Prohibition, professional economists and the general public were becoming increasingly aware of the costs and ineffectiveness of the "noble experiment." Two noteworthy examples of economists who examined Prohibition and found Fisher's position less than accurate were Clark Warburton and Herman Feldman.

In Prohibition: Its Economic and Industrial Aspects (1930) Herman Feldman, an otherwise undistinguished economist, published an important contribution to the statistical investigation of the "economic" aspects of Prohibition.[11] His book is based on twenty articles written for the Christian Science Monitor, and the statistical information derives from a detailed survey. The book is most impressive in its caution concerning the use of survey data, statistical analysis, and the conclusions made throughout the book.

His book is noteworthy for its criticism of Fisher's estimate of the economic loss due to the consumption of alcohol, despite the fact that Feldman was writing for the Christian Science Monitor, a champion of Prohibition.

Even the writings on prohibition by some distinguished economists show a certain freedom from scientific restraint not normally found in their discussions of other subjects. One of the most curiously constructed statistical statements, for example, is that by which Professor Irving Fisher, of Yale, deduces that prohibition has been worth at least $6,000,000,000 a year to this country. This figure, widely quoted, has often been used as if it were a painstaking, scientific calculation based on a meticulous combing of economic data. On the contrary, it is merely a guess, and of a type frequently issued by groups with propaganda in mind, but hardly to be expected from one who has achieved world-wide prominence as a statistical economist. (Feldman 1930, 5)

"Establishing the link between Prohibition and reduced absenteeism was vital to sustaining public support of the policy."

Fisher's estimate was based on uncontrolled experiments on the effect of alcohol on industrial efficiency. These experiments were made on one to five individuals who took strong doses of alcohol on an empty stomach before beginning work. These "studies," some of which were based solely on the effects of alcohol on the experimenter himself, found that average efficiency was reduced by 2 percent per drink. Fisher then assumed a dosage of five drinks per day and extrapolated the loss of total efficiency per worker to a 10 percent reduction in efficiency. If alcohol consumption by workers could be reduced to zero, Fisher estimated, the country could save at least 5 percent of total income, or $3,300,000,000. The elimination of the alcohol industry would also save an additional 5 percent in national income as resources would be transferred out of alcohol production and into other goods and services. Feldman noted that a 2 percent loss in efficiency could be caused by "a mere depressing thought," and that Fisher failed to account for the fact that most alcohol consumed by the working class was beer with meals hours before work. Indeed, historical experience suggests that alcohol was consumed on the job in order to increase the overall efficiency of production. "It will require experiments on a far larger scale, and under much more rigorously controlled conditions than those now recorded, to determine the effect of alcoholic beverages upon industrial efficiency with the definiteness expressed. The experiments, considered solely as bases for the economic calculations made [by Fisher], are inconclusive of themselves" (Feldman 1930, 240-41).

Feldman was also known for his survey of absenteeism. He surveyed industrialists concerning the absence or tardiness of workers on Mondays and the days following paydays. The survey asked whether the respondents felt Prohibition was the cause of any noticeable reduction in absenteeism. Information on the relationship between alcohol consumption and absenteeism prior to Prohibition was not available.[12] Of the 287 responses to Feldman's survey, less than half felt that there was considerable improvement in absenteeism. One-third of the respondents who did detect decreased absenteeism failed to attribute this improvement to Prohibition. Some employers even reported higher absenteeism and attributed the increase to Prohibition. One employer noted that "the stuff available to labor, and there is plenty of it, is so rotten that it takes the drinking man two or three days to get over his spree" (Feldman 1930, 211).

Feldman himself described some of the faults of the survey method, such as personal or political bias in completing the forms, and he cautioned against a strict interpretation of the results. Other points of contention with the conclusions of the survey were that private prohibition and stricter employer liability and negligence laws all contributed greatly to reducing absenteeism. Improved safety conditions, higher wage rates, reduced working hours, and more formal labor contracts also improved attendance. On the other hand, booming standards of living and new leisure alternatives, such as the automobile, also influenced absenteeism during the 1920s.

Feldman obtained only one company's records on absenteeism that contained data from before and after Prohibition. He noted that the company which supplied this information indicated that the improvement in attendance was not due to Prohibition but rather to improvement in labor. His data along with the 1929 update provided by the Bureau of Prohibition are presented in table 1.

Table 1. Absenteeism Rates in a Delaware Gunpowder Plant

1907 1913 1924 1929
Monday 7.41 6.17 3.66 2.35
Tuesday 6.89 5.22 2.86 2.10
Wednesday 5.77 5.49 2.90 2.15
Thursday 5.68 5.06 2.37 2.01
Friday 5.38 5.05 2.10 1.89
Saturday 6.94 6.59 3.93 2.95
Average for week 6.35 5.59 2.96 2.24

Source: Warburton 1932, 205.

Feldman's cautions and clarifications concerning the data were not sufficient to prevent the data from being used to support the case for the economic benefits of Prohibition enforcement. "All of us know that industrial efficiency was one of the chief reasons for Prohibition" (I. Fisher 1927, 158). The report of the National Commission on Law Observance and Enforcement (1931) began the section on the economic benefits of Prohibition with the statement: "The subjects upon which there is objective and reasonably trustworthy proof are industrial benefits — i.e., increased production, increased efficiency of labor, elimination of 'blue Monday;' and decrease in industrial accidents" (71). The report goes on to emphasize the reliability of these facts with respect to absenteeism: "There is strong and convincing evidence, supporting the view of the greater number of large employers, that a notable increase in production, consequent upon increased efficiency of labor and elimination of the chronic absences of great numbers of workers after Sundays and holidays, is directly attributable to doing away with saloons" (71).

The Bureau of Prohibition took Feldman's data one step further by obtaining data for 1929 and publishing the results in The Value of Law Observance (1930, 11) These data were purported to show the decline of "blue Monday" as evidence of the economic benefits of Prohibition.

Americans were becoming increasingly aware that while Prohibition had eliminated the open saloon, it had not stopped the liquor traffic. The costs of enforcing Prohibition were increasing, and economic prosperity, purportedly the main benefit of Prohibition, ended with the stock-market crash in 1929. Establishing the link between Prohibition and reduced absenteeism was vital to sustaining public support of the policy.

By far the most thorough study of Prohibition was by Clark Warburton. His two main contributions were The Economic Results of Prohibition (1932) and his entry on Prohibition in the Encyclopedia of the Social Sciences (1934)[13] Warburton's book was imitated at the request of the Association against the Prohibition Amendment, from which he received financial support during the early stages of his investigation.[14]

"Expenditures on beer fell dramatically, while expenditures on distilled spirits increased."

Warburton's book was a statistical analysis of the economic arguments for and against Prohibition. Primarily he examined alcohol consumption, expenditures on alcohol, and the impact of Prohibition on industrial efficiency, public health, income and demographic groups, and public finance. He used all available statistics, produced estimates from underlying conditions, and in many cases used more than one estimating technique. Warburton cautiously alerted his reader to weak links in estimation techniques and data collection.[15] "In these circumstances no study of the results of prohibition can claim high precision and unquestionable proof. The conclusions stated here can claim, however, to be reasonable inferences, after intensive study and analysis, from such data as are available" (Warburton 1932, 259).

Warburton concluded that consumption of all alcohol per capita declined nearly one-third from 1911-14 to 1927-30, but that consumption of spirits increased 10 percent during the same period. He found that expenditures for alcohol during Prohibition were approximately equal to what expenditures would have been had the pre-Prohibition conditions existed.[16] Expenditures on beer fell dramatically, while expenditures on distilled spirits increased. He was unable to establish correlations between Prohibition and prosperity, saving, insurance costs, or the purchase of consumer durables.

Warburton found that the data did not show a measurable relationship between Prohibition and the decrease in industrial accidents. He also found that Prohibition had no measurable effect on the observed increase in industrial productivity and that statistical evidence was lacking to establish the influence of Prohibition on industrial absenteeism. With regard to Feldman's survey, Warburton noted that the reduction in absenteeism was more plausibly the result of the reduction in the number of hours worked and the lightening of actual work tasks (less manual, more mechanical), as well as the introduction of new and greater quantities of recreational and leisure activities as substitutes for alcohol.[17]

Warburton went on to criticize the applicability of the data on absenteeism from the single gunpowder plant that was cited by the government in support of the economic benefits of Prohibition. Using the original data, Warburton calculated the average annual percentage decline in absenteeism (table 2). He showed that the annual percentage decline in absenteeism on Mondays did not differ much in the pre-Prohibition period, the transitional period, and the Prohibition period. It seems the reduction of absenteeism is difficult to attribute to Prohibition but easy to associate with other factors, such as the reduction of the work week, increased real wages (during the 1920s), and improved labor-management techniques.[18]

Table 2. Average Annual Percentage-Point Decline
in Absenteeism in a Delaware 'Gunpowder' Plant'

1907 — 13 1913 — 24 1924 — 29
Monday 0.21 0.23 0.26
Tuesday 0.28 0.21 0.15
Wednesday 0.05 0.24 0.15
Thursday 0.10 0.24 0.15
Friday 0.06 0.27 0.04
Saturday 0.06 0.24 0.20
Total 0.76 1.43 0.87

Source: Warburton 1932, 205.

Greater experience with Prohibition resulted in increasing skepticism among economists. This trend can be traced to three factors. First, the black market continued to grow and develop despite increased enforcement efforts and reorganization of the Prohibition bureaucracy. Second, as data were collected over a longer period, trends of increased consumption and crime became evident. Third, the longer Prohibition was enforced, the more knowledge spread concerning the adverse consequences and the difficulty of enforcement (also see Thornton 1991 B for more details concerning the results of alcohol prohibition).

The Economics of Heroin Prohibition

The sale of heroin and other opiates has been illegal at the federal level since the passage of the Harrison Narcotics Act in 1914. Most states had already enacted prohibitions and restrictions on these products prior to the federal legislation. While narcotics were mentioned by economists such as Patten, Veblen, and Fisher, economists paid little attention to narcotic prohibition for the first fifty years of its existence. Simon Rottenberg's article (1968) on the economics of illegal heroin was published at a time when the general public and social scientists were beginning to examine the results of this prohibition.

In his seminal article Rottenberg (1968) described the options available to authorities, noting some of the factors that influence the activities of the law-enforcement bureaucracy. He also described the market structure, organization, and competitive forces but seemed to find the application of traditional economic analysis to the illegal market for heroin difficult because of the market's complex interaction with law enforcement. As a result, Rottenberg raised more questions than he answered.

"Society faces a trade-off between enforcing narcotics laws and enforcing other criminal laws."

Rottenberg found the heroin market more organized and monopolized than other illegal markets. He examined the impact of crime on society, particularly in connection with the allocation of police resources. Society faces a trade-off between enforcing narcotics laws and enforcing other criminal laws. Rottenberg detailed the corruption and the corruptive process in illegal drug markets and at one point anticipated James Buchanan's argument for organized crime.[19]

A theme that hindered Rottenberg's analysis was that the product which defined the market changed as it moved from production to consumption. He noted that heroin was diluted as it passed through the distribution chain to the consumer and that the final product was subject to wide variations in potency. He offered three hypotheses to explain changes in potency. The first, which he considered questionable, was that consumers were very responsive to price changes but not to changes in potency. His second hypothesis held that lowering potency was a rationing device when heroin was in short supply. While this may help explain the variation in potency, it does not explain either the systematic changes or "the apparent secular tendency for dilution to occur" that Rottenberg noted. The third hypothesis was that dilution allowed for differentiation of the product so that the consumer could be better served. Again, Rottenberg found this hypothesis unsatisfactory in explaining an important trend. On the subject of drug potency, Rottenberg noted: "It is like explaining why Falcon automobiles will be manufactured, as well as Continentals, but would not explain why the fraction of Falcons rises and the fraction of Continentals falls" (1968, 83).

In summary, Rottenberg's contribution is descriptive and institutional, but it contains little of lasting theoretical or empirical value. He developed more questions than answers, but this is precisely why his contribution is important. Answers to his questions, extensions of some of his points, and corrections of others characterize much of the research on prohibition since the publication of his article.

Two noteworthy comments that raised important matters of substance and questioned the basic validity of prohibition followed Rottenberg's article. Edward Erickson (1969) indicated that efforts to decrease the supply of euphoric drugs resulted in important social costs, such as higher production costs per unit of euphoria produced, increasing redistribution of income through theft by addicts, and debasement of drug-law enforcement. Given these costs, society should move to less enforcement.

Raul A. Fernandez (1969) discussed two related points concerning the market for heroin that Rottenberg did not explicitly examine. First, the status of heroin addicts as user-sellers leads to important difficulties and complexities in applying economic theory to this market. Addiction is also important for Fernandez because addiction reduces the deterrent effect of prison sentences. It is the question of addiction to heroin which would lead economists again to question the fundamental axiom of individual rationality in connection with the use of illegal "addicting" drugs. Fernandez suggests that the proper approach to addiction is not prohibition but treatment for addiction.[20]

Mark H. Moore (1977) provides a detailed analysis of the illicit market for heroin and law enforcement in New York City.[21] His analysis uses economic theory, law and law-enforcement analysis, and direct empirical observation of the workings of the heroin market in New York City. These tools allow Moore to present a realistic picture of the complexities of the heroin market and to debunk several commonly held beliefs concerning the illicit heroin market. Indeed, his work represents what is now the conventional wisdom on public policy toward the heroin market.

Prior to Moore's study, conventional wisdom said that the demand for heroin was perfectly inelastic and that higher prices would not result in decreased consumption. Higher prices served only to increase the costs to society and the profits for drug dealers. Higher profits stimulated drug dealership and new consumption, and therefore worked against the goals of public policy.[22] Moore effectively argues against both the assumption of perfectly inelastic demand and the notion that drug dealers are better off as a result of increased law enforcement (1977, 5-15).

Moore recommends effective regulation of heroin by continuing the current policy of prohibition.[23] In raising the effective price of heroin, prohibition discourages "not-yet users" from trying the drug, but has only a marginal effect on "current users." Moore notes that heroin use is initiated and spread through friends and neighborhood groups and that it is difficult for law enforcement to infiltrate these tight-knit groups. He postulates that if access to heroin could be prevented by raising the cost of acquiring heroin, the spread of heroin use could be stopped and "not-yet users" discouraged from trying the drug.

It is erroneous, however, to claim that prohibition is necessary to discourage access to heroin because of the particular system by which it spreads (small social groups) when prohibition itself is responsible for this system. Moore himself argues that it is prohibition that is responsible for the peculiar organization of the illegal heroin market: "It is almost certain that the single most important factor influencing the structure of heroin-distribution systems is that producing, importing, selling, and possessing heroin are all prohibited in the United States. Why, for example, isn't the industry organized into larger and more impersonal marketing systems?" (1977, 3; emphasis added). Further, he makes no attempt to justify prohibition as the only or best way of preventing consumers from experimenting with heroin.[24]

Prohibition is harmful to current users and higher prices lead addicts to inflict costs on the general population in the form of muggings, robbery, and burglary.

Moore recommends that a variety of programs be established for current users of heroin. He recognizes that prohibition is harmful to current users and that higher prices lead addicts to inflict costs on the general population in the form of muggings, robbery, and burglary. To avoid these problems, Moore recommends that addicts be given a low-cost source of heroin or methadone; that addicts have access to treatment facilities, jobs, reasonable living standards, recreation, and entertainment; and that arrested users be allowed to enter treatment facilities rather than prison (1977, 258-61).

Moore's reasons for trying to reduce the effects of prohibition on current users are well founded. His recommendations are flawed in several respects, however. His attempt to establish price discrimination would have important drawbacks and be difficult to carry out. For example, his recommendations would reduce the cost of becoming an addict and therefore would act to stimulate experimentation with heroin. Moore himself recognizes the contradiction in his policy recommendations:

Note that the dilemma faced in enforcing narcotics laws is common to all negative incentive systems. The problem is fundamental: The desire to have the incentive conflicts with the desire to minimize the damage done to people who do not respond to the incentive. One cannot lessen the adverse effects on current users without having some effect on the magnitude of the incentives facing nonusers. One cannot alter the incentives facing nonusers without having some effect on the consequences for current users. (1977, 237)

Moore's recommendations would also involve large increases in government expenditures. His claims that there is general support for the policy of prohibition (1977, xxi) fail to give adequate consideration to the taxpayers' toleration of the cost of his recommendations.

With respect to prohibition, Moore seems to be his own best critic:

The single, most important objective of a narcotics-enforcement strategy is to discourage people who are not now using heroin from beginning to do so. If the police cannot achieve this objective at a reasonable cost in terms of public resources and maintenance of civil liberties, the prohibition policy ought to be abandoned. There are too many bad side effects of the policy and too few direct benefits other than preventing new use to warrant continuation of the policy if it cannot discourage new use. (1977, 238)

Finally, Moore reminds his reader that his study focused on but one illegal drug within New York City and, further, that his methodology was insufficient completely to analyze the problem at hand:

There are serious limitations to the methodology employed in this book. The methodology is similar to that used in developing intelligence estimates. Bits of unverified, half-verified, and fully verified information are assembled into a systematic picture by combining arbitrary definitions with assumptions about how reasonable men behave…. It [the methodology employed] has the disadvantage of providing only good guesses about the nature of the phenomenon. Moreover, the guesses may be radically altered by the introduction of a single, verified piece of information. (1977, 4)

Therefore, while Moore's contribution is important in extending the literature concerning the heroin market, weaknesses in methodology and scope undermine the applicability of his policy recommendations.[25] By defeating the conventional approach of the 1960s, Moore reestablished the viability of prohibition as a policy to control heroin use.

The Economics of Addiction

The history of economic thought is strewn with attacks on individual rationality.[26] The consumer has been criticized for consuming on the basis of imperfect information, as well as not consuming because of imperfect information (that is, hoarding). The consumer has been criticized for steadfastly maintaining a consumption plan despite changing circumstances, problems, and severe difficulties (habits, addictions), as well as not maintaining established consumption plans due to changing circumstances, information, and evaluations (impulse buying, binging). According to Israel Kirzner, "The concept of rationality in human behavior has long been a topic for discussion in the literature on the methodology of economics. Attacks on the undue reliance which economic theory has been accused of placing upon human reason are as old as attacks on the very notion of an economic theory" (Kirzner 1976, 167).

The irrationality claim has been made with respect to addictive goods such as alcohol and narcotics since at least the time of Vilfredo Pareto. Pareto made a distinction (similar to Fisher's) between logical actions, which are rational and economic, and illogical actions, which are not. Irrational action was found in the case of a man who established a detailed budget devoid of wine expenditures and then proceeded to binge on wine. Benedetto Croce explained that this act was an economic error because the man yielded to a temporary desire at odds with his established plans.[27] Such notions of logic and rationality are primary theoretical justifications for prohibition. The type of "irrationality" described by Paul Fernandez (1969), however, forms a basis of attack, rather than a justification for prohibition.

In defining the Chicago school's position on tastes, George S. Stigler and Gary S. Becker (1977) have also commented on the nature of addiction. They find that beneficial and harmful addictions depend on whether prolonged use enhances or diminishes future consumption. Good addictions involve the consumption of goods, such as classical music, that increase utility over time and do not disrupt utility derived from other goods. Bad addictions involve a reduction in future consumption ability. Alcohol decreases future utility because it reduces the utility of a given amount of future consumption as well as the utility from other goods. Addiction is a rational habit that is consistent with preferences and opportunities but one that hinges on the type of capital effect the good produces.[28]

Thomas A. Barthold and Harold M. Hochman (1988) contest Stigler and Becker's view of the rational addict: "Whether addiction is rational behavior … seems beside the point" (90). They begin with the premise that addictive behavior is extreme behavior, "neither normal or typical."[29] They find that compulsion is the driving force behind addiction, but that an individual must be an "extreme seeker" for compulsion to develop into addiction. Consumption can have capital effects that will cause irreversible harm if they pass a certain threshold.

Barthold and Hochman attempt to model multiperiod, multiplan, multiprice consumption by identifying addiction with concave indifference curves (atypical preferences). They find that changes in relative prices can lead to corner solutions (peculiar consumption decisions), that consumption decisions are "sticky" at low prices, and that consumption can lead to addiction.

Robert J. Michaels (1988) models compulsive behavior through an integration of the psychological literature on addiction with the consumption model developed by Kelvin Lancaster (1966). Self-esteem is entered into the addict's utility function. Michaels is then able to explain many of the observed behavioral patterns associated with addiction, such as the ineffectiveness of treatment programs, the agony of withdrawal, radical changes by the addict (such as conversion to religion), the use of substitutes, and the typical addiction pattern of use, discontinuation, and backsliding.

The interpretation of consumer behavior in the Lancastrian consumption technology reasserts the rationality of choice by addicts. In addition, it does so without assuming unusual preferences of consumers or unusual properties of the "addictive" good.[30] Michaels finds that prohibition is an inconsistent policy with respect to addictive behavior in the sense that a policy that attempts "to convince users that they are losers is more likely to fail … and may induce increases in the level at which it [consumption] is undertaken" (1988, 85). The model is lacking in several respects, however. It does not consider the supply side of the market (either legal or illegal), nor does it consider problems such as the externalities of the addict's behavior.[31] Finally, Michaels bases the utility function on one current understanding of addictive behavior, which, he points out, is subject to change.[32]

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Gary S. Becker and Kevin M. Murphy (1988) further develop the theory of rational addiction as introduced by Stigler and Becker (1977), in which rationality means a consistent plan to maximize utility over time. Their model relies on "unstable steady states" to understand addiction rather than on plan-alteration through time. They use consumption capital effects, adjacent complementarity between present and future consumption, time preference, and the effect of permanent versus temporary price changes to explain such nonnormal behavior as addiction, binges, and the decision to quit cold turkey.

Becker and Murphy note, "Addiction is a major challenge to the theory of rational behavior" (1988, 695). They claim it challenges both the Chicago approach to rational behavior and the general approach to rationality in which individuals attempt to maximize utility at all times. Becker and Murphy successfully defend Chicago rationality and are able, through changes in economic variables, to explain behavior associated with addiction. The introduction of unstable steady states defends rational behavior against Croce's original criticism and represents a marginal move toward the Austrian notion of rationality. In the Austrian view, plans are made by individuals under conditions of limited information and uncertainty. Plans are made at points in time, but choice cannot be independent of actual choice. Becker and Murphy adjust their notion of rationality from one of "a consistent plan to maximize utility over time" (1988, 675) to one where "'rational' means that individuals maximize utility consistently over time" (1988, 694).

This literature explores the question of rationality with respect to addiction and dangerous drugs. For the most part, it shares the common heritage of the Chicago tradition. Rationality is a crucial issue for both prohibition and economic theory in general. While this literature is in general agreement with Fernandez on the difficulty of making prohibition work, its conclusions are based on the rationality of the consumer rather than the lack of it. As a result, prohibition is found to be costly, inconsistent, incomplete, or of limited value.


Mark Thornton teaches economics at Auburn University. He is a senior resident fellow at the Ludwig von Mises Institute in Auburn, Alabama, and is the Book Review Editor for the Quarterly Journal of Austrian Economics. He is co-author of Tariffs, Blockades, and Inflation: The Economics of the Civil War. Send him mail. Comment on the blog.

This article is excerpted from Professor Thornton's book The Economics of Prohibition.

Notes

[1] See Friedman 1989.

[2] Ekelund and Tollison's conclusions are based in part on Thornton 1986, an earlier version of chapter 4 of this book.

[3] Postmillennial pietists believe that there will be a thousand-year kingdom of God on earth and that it is man's responsibility to establish the necessary conditions as a prerequisite for Jesus' return.

[4] In a sobering passage, Newcomb (1886, 11-13) used the drinking of alcohol (i.e., "gratifying the morbid appetite") to distinguish correctly between the sphere of moralists and the role of political economists — to separate "the totally different … questions whether an end is good and how an end can best be attained." Newcomb suggests that the "economist might say in conclusion" that he knows "of no way in which a man can be made to accept that which he desires less in preference to that which he … desires more, except positive restraint."

"It is interesting to note that Veblen built his concept of 'conspicuous consumption' partly on the basis of goods such as alcohol, tobacco, and narcotics."

[5] Boswell 1934, 48; also see Fox 1967, 104-5. Most American economists of this time took a dim view of alcohol use. It is interesting to note that Veblen built his concept of "conspicuous consumption" partly on the basis of goods such as alcohol, tobacco, and narcotics.

[6] Fisher's main contributions to the study of Prohibition include those published in [1926] 1927, and 1930. A biography of Fisher by his son, Irving Norton Fisher (1956), details Fisher's activist approach to social problems.

[7] The attention received for this distinction is described in Fisher's biography (I. N. Fisher 1956, 48-50). Edgeworth's review of Fisher's dissertation appeared in the March 1893 issue of Economic Journal.

[8] For further illustration of Irving Fisher as a technocratic-type socialist, see his presidential address to the American Economic Association in 1919.

[9] Fisher himself considered the adoption of the Prohibition Amendment a premature act. He felt that more time was needed to establish a national consensus and to provide for education and policy development. Fisher often praised the indirect benefits of World War I, such as the collection of statistics by the federal government, the passage of Prohibition, the opportunity to study inflation, and the powerful jobs made available to economists. See I. N. Fisher 1956, 154; I. Fisher 1918 and 1919; and Rothbard 1989, 115.

[10] By 1933 Fisher must have been thoroughly disheartened with the course of events. A new age of prohibition and scientific management of the economy — a permanent prosperity — had come crashing down around him. Not only had Prohibition been repealed and the economy devastated by the Great Depression, he had lost his personal fortune on his own advice in the stock market. With respect to alcohol he turned his attention to the temperance movement by publishing three editions of a book on the evils of alcohol consumption.

[11] A search of the Index of Economic Journals showed Herman Feldman's contributions were limited to two review articles and four monographs on labor policy.

[12] A Boston rubber company which employed almost 10,000 workers reported that company nurses made 30,000 visits in 1925 but could not state with any certainty that alcohol was the cause in more than six cases (Feldman 1930, 203).

[13] It is particularly interesting that Warburton was chosen to produce the entry on Prohibition, as Irving Fisher was one of the editors of the Encyclopedia.

[14] Despite the role of this special-interest group in initiating this study, several prominent economists read and commented on the final work. Warburton thanks Wesley C. Mitchell, Harold Hotelling, Joseph Dorfman, and Arthur Burns for comments and advice in the preface.

[15] Warburton does not appear to have been building a case against prohibition; for example, he omitted all discussion of the increasing cost of prisons and the congestion of the court system directly attributable to the enforcement of Prohibition.

[16] He notes that the estimates for expenditures fall within a wide range, plus or minus one-quarter to one-third based on the underlying assumptions of the estimates. Proponents of Prohibition, such as Feldman 1930 and later T. Y. Hu 1950, argued that the estimates were too high, but modern experience with the prohibition of marijuana would probably produce the exact opposite reaction (i.e., that they were too low).

[17] Warburton noted that the length of the average work week had declined dramatically since Prohibition began. It should also be noted that real wage rates increased significantly from the prewar years to the late 1920s. Higher wages normally result in a more responsible workforce and a higher opportunity cost of leisure, especially when the work week is shorter.

[18] The average national work week declined 3.14 percent in the pre-Prohibition period, 9.19 percent in the transitional period, and did not change in the Prohibition period (Warburton 1932, 205).

[19] See Buchanan 1973, 119-32. Also see Sisk 1982 for a criticism of this view.

[20] Fernandez attempts to estimate the benefits of rehabilitating heroin addicts, and he explores the Marxian approach to heroin addiction (1971, 1973). He applies class analysis to the understanding of the origins of narcotics legislation and the allocation of enforcement resources to crime/class categories. He also inquires into the role of neoclassical (purely formal) rationality, modern approaches to criminology, and the Marxian notion of lumpenproletariat (the poor), for the study of addiction and prohibition. Also see Bookstaber 1976 on the market for addictive drugs.

[21] Also see Moore 1973, 1976.

[22] Moore cites Phares 1973 and Votey and Phillips 1976 as representative of the conventional analysis.

[23] Moore notes, "Effectively prohibiting heroin (i.e., eliminating all supplies of heroin) is impossible without unacceptable expenditures and intolerable assaults on civil liberties. Hence, regulation is a more appropriate and feasible objective than prohibition" (1977, xxi).

[24] Articles by various authors reprinted in Morgan 1974 suggest that prior to opiate prohibition, addiction and use spread from doctors and druggists. Morgan himself suggests that little has changed since the prohibition of narcotics in terms of the size of the American addict population.

[25] Clague 1973 provides an ordinal ranking of five public policies toward heroin based on seven criteria: crime, number of addicts, well-being of addicts, police corruption, police violation of civil liberties, legal deprivation of traditional liberties, and respect for the law. The policies evaluated include prohibition, methadone maintenance (strict and permissive), heroin maintenance, and quarantine. By and large, heroin maintenance received the highest marks and prohibition received the lowest marks.

[26] While rationality is fundamental to most schools of thought, it should be recognized that the meaning of rationality and the role it plays in economic analysis differs from school to school. See, for example, Becker 1962, 1963. Also see Kirzner 1962, 1963.

[27] See Croce 1953, 177. For an early critique of Croce see Tagliacozzo 1945. For a general discussion and modern critique see Kirzner 1976, 167-72; 1979, 120-33.

[28] For a full development of integration of habits into neoclassical economic analysis, see Ault and Ekelund 1988

"While no particular addiction is common throughout the population, some form of addiction or compulsion is normal, whether it be to wine, mystery novels, or chocolate."

[29] They find it neither typical nor normal despite the fact that they cite figures to suggest that heroin use among American soldiers during the Vietnam War was typical. They also cite figures which suggest that while no particular addiction is common throughout the population, some form of addiction or compulsion is normal, whether it be to wine, mystery novels, or chocolate.

[30] Michaels criticizes Barthold and Hochman's (1988) assumptions about consumer preferences "that there are a small number of repellent people in the world whose preferences are characterized by an extreme nonconvexity. Such an assumption would seldom be found acceptable in other areas of economics. Fortunately it is not needed here" (Michaels 1988, 86-87).

[31] Michaels addresses many of these points (1987, 289-326).

[32] As Barthold and Hochman (1988, 91) point out: "Psychologists and sociologists claim little success in describing an 'addictive personality,' finding at most that alcoholics (and drug addicts) appear … different from others,' according to Lang (1983, 207); but not in a discernible systematic way (at least from the variable they examine)." There is currently a debate between the disease approach and the free-will approach to addiction. Within the free-will camp there is a disagreement on whether addiction represents a loss of will or simply the lack of it.