Book Review: Narconomics

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

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

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

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

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

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

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

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

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

Burn­ing coca leaves won’t win the war

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

Easy. Con­stant de­mand + re­stricted sup­ply → in­creased price.

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

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

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

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

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

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

Polic­ing drug routes won’t win the war

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

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

  • Wain­wright’s driver, Miguel, leaves a lot of room be­tween cars when he stops at traf­fic lights, be­cause traf­fic lights are known for be­ing as­sas­si­na­tion hotspots (as­sas­s­ins can drive up, shoot, and speed away eas­ily).

  • A lo­cal car­tel, Si­naloa, hung a warn­ing poster on a pub­lic memo­rial to fallen po­lice officers. The poster had names of sev­en­teen po­lice officers. Soon af­ter, it started kil­ling the officers named on the list.

  • The city and fed­eral po­lice were bribed by com­pet­ing gangs, lead­ing to an as­sas­si­na­tion where a city cop was shot by a fed­eral cop.

  • A car­tel mur­dered a re­porter and broke into her Twit­ter ac­count to tweet a pic­ture of her dead body as a warn­ing to other re­porters.

  • Car­tels time mur­ders to hap­pen in the early evening, so that their ex­ploits lead the 6:00pm news.

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

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

Im­pris­on­ing offen­ders won’t win the war

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

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

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

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

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

The ar­gu­ment for legalization

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

The cur­rent war is doomed to fail be­cause:

  1. The end price of co­caine is so high that most sup­ply-side in­ter­ven­tions will not change it sig­nifi­cantly.

  2. Even if an in­ter­ven­tion does change the end price of co­caine, the de­mand is in­elas­tic and won’t drop much.

  3. Be­cause de­mand is in­elas­tic, in­creases in the price of co­caine just make the mar­ket more valuable and al­lur­ing.

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

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


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

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

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

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

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

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

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