Milton Friedman on the Legalization of Drugs: A Study in Deception and Compromise
Reality Check
Milton Friedman was known as a libertarian. But in three major areas, he refused to defend free market principles: central banking, tax-funded education, and the legalization of drugs. His compromises on monetary policy and education (vouchers) are well known in Austrian economics circles. His stand on drugs is not. He waffled. He deceived. He compromised.
The legalization of drugs has only been an issue in the 20th century the 21st century. Prior to 1914, which means prior to the cartelization of the medical industry, there were no restrictions on Americans' consumption of drugs. The federal government's war on drugs has always been part of a larger war: the war on medical choice.
As for the American voters' avid promotion of laws against drugs, it's all a matter of political cost-benefit analysis. We know where the major drug emporiums are: the public schools. The war on drugs should begin with the removal of all tax funding for education. But the voters are committed to tax-funded education: America's only established church. If it's a question of closing the public schools vs. having Billy Bob and Jenny Sue snorting cocaine after school, Billy Bob and Jenny Sue had better look out for themselves. They had better use self-denial. "Just say no!" That is because the voters will not say no to tax-funded education. They are determined not to pay for their children's education. They would rather take their chances with drugs.
THE ROCKEFELLER CONNECTION
It was only after the Rockefeller Foundation began to promote the cartelization of the medical profession, using the non-physician Abraham Flexner as its main spokesman, did we see the move to make illegal various sorts of drugs. This began in 1910. It began with a call to control medical education, converting it into a cartel. This led to state licensing of colleges and universities, a massive cartel that generates around $400 billion a year for the cartel. This story is well known by anti-Rockefeller libertarians and conservatives.
In 1914, the first federal law against the domestic sale of narcotics was passed, the Harrison Narcotics Tax Act, named for its sponsor in the House of Representatives, F. B. Harrison. (Side note: he was a Skull & Bones member.) It declared: "An Act To provide for the registration of, with collectors of internal revenue, and to impose a special tax on all persons who produce, import, manufacture, compound, deal in, dispense, sell, distribute, or give away opium or coca leaves, their salts, derivatives, or preparations, and for other purposes."
This act was part of the reforming impulses of the Progressive movement. A major source of initial funding for the "sanitary living" side of this movement was John D. Rockefeller, Jr. In 1910, he was pressured to sit on a grand jury investigating corruption in New York City's government. That was the Augean stables. As a result, he became a dedicated reformer of public ethics for the rest of his life. In 1911, he hired the man who became his right-hand man for the rest of his life, lawyer Raymond Fosdick, the brother of another ardent reformer, Harry Emerson Fosdick, who became Rockefeller's pastor in 1924. (I discuss all this in my 1996 book, Crossed Fingers, which you can download for free here. Begin on page 377.)
The political cover for the cartelization of the pharmaceutical industry has always been state restrictions on the sale of drugs that are in some way addictive. The big money has been made by the federally protected drug cartels, which produce legal but restricted-access drugs. Big Pharma operates in terms of federal and state laws prohibiting the sale of rival drugs. The cartel that makes a major difference in the economy is the conventional drug industry, not the gangs.
When compared to the massive profits of the legal but restricted drug cartel, the Mexican drug cartel and other gang-related drug cartels are small potatoes. They sell to poor people. They sell drugs in the inner cities. They do sell drugs to upper-middle-class businesspeople, and they make a lot of money doing this. But these are fringe organizations. They do not have the force of law behind them. They do not have the medical industry behind them. They do not have the voters behind them. They do not have the patent law system behind them.
FRIEDMAN'S MARKETING PROBLEM
Libertarians have always had a problem with drug legalization. If they were really consistent about this, they would uniformly oppose all patent laws, all regulations related to the medical industry, all state-run certification systems of drugs, all state-run certifications of medical practice, and all restrictions on advertising in any of these fields. All of this should be promoted as a way to shrink the state. The state is by far the most widely used addictive substance. But, point by point, institution by institution, regulation by regulation, most academic libertarians wimp out. On some major issue, they crawfish.
Let me give you a classic example. Milton Friedman was known as a libertarian. On several occasions, he presented the case for the legalization of illegal drugs. He also opposed the Federal Drug Administration. So far, so good, But he got to advertising, and he wimped out. To understand why he wimped out, we need to understand basic economic theory. Fortunately, in this case, Friedman gave us the basics. Then he chickened out.
The economic issue here is marketing. In a free market society, the fundamental tool of breaking into a new market is price competition. This has been true from the beginning, and it is well recognized by free market economists. Price competition enables new producers and more efficient producers to gain market share, especially in a market that has been controlled by the government through barriers to entry. When the barriers to entry cease, price competition becomes the primary tool of gaining entrance into a previously controlled market.
Friedman fully understood this. In a discussion on the effects of the legalization of habit-forming drugs, he made this statement.
The one adverse effect that legalization might have is that there very likely would be more people taking drugs. That's not by any means clear. But, if you legalize, you destroy the black market, the price of drugs would go down drastically. And as an economist, lower prices tend to generate more demand. However, there are some very strong qualifications to be made to that.
Strong qualifications? What strong qualifications? We shall soon see. But first. . . .
He got to the edge of the cliff, but he chickened out. He refused to jump. He knew the fundamental rule of economics: when the price falls, more is demanded. There is no more fundamental rule of free market economics. If you don't accept this, you don't accept free market economics. If you qualify this into oblivion, you qualify all of free market economics into oblivion. If this is not true, then free market economics is not true. Friedman knew that. And yet, he tried to qualify it in such a way that the obvious implication of what he was recommending would be in some way blurred.
Friedman had a marketing problem, and so, in order to limit the adverse effects of economic truth on his marketing problem, he wimped out. He invoked some sort of peculiar and unsubstantiated theory of marketing.
Legalizing drugs might increase the number of addicts, but it is not clear that it would. Forbidden fruit is attractive, particularly to the young.
This is the only time I ever saw Friedman go back to the Garden of Eden to make an argument against the obvious implications of the free market. He talked about forbidden fruit. He thought this would be an offsetting aspect of the legalization of drugs.
I ask: What about Madison Avenue? What about the gigantic advertising industry? That was -- and is -- the #1 threat to his theory of the forbidden fruit effect
He knew exactly what this threat was. He stated what the threat was. The threat was the overwhelming power of modern advertising techniques to gain market share. Not only this, but these techniques would be added to the other traditional tool of gaining market share, namely, price competition. Here's what he said about advertising what are now illegal drugs, but which would be, under his recommendation, legal drugs.
With respect to restrictions on advertising, I feel uneasy about either position. I shudder at the thought of a TV ad with a pretty woman saying, "My brand will give you a high such as you've never experienced." On the other hand, I have always been very hesitant about restrictions on freedom of advertising for general free speech reasons. But whatever my own hesitations, I have very little doubt that legalization would be impossible without substantial restrictions on advertising.
So, he felt uneasy. I ask: What has that got to do with the logic of economics? How he felt was irrelevant.
He proposed a solution: federal regulation of advertising. He invoked this as the justification for state interference in the drug marketplace. Companies will be allowed to sell drugs that are today illegal, but they will not be allowed to hire specialized advertising agencies to promote the sale of these drugs. Here, we need federal law. Here, we need badges and guns. Here, we need the abolition of libertarianism.
Here, we have Milton Friedman in action. He got to the edge of liberty. Austrian economists shouted: "Jump!" He refused. This happened more than once. From tax-funded vouchers for education to limits on advertising, he refused to jump. He supported state controls.
It got worse. He used a pejorative word to describe marketers in the illegal drugs market: "pushers."
More important, many drug addicts are deliberately made by pushers, who give likely prospects their first few doses free. It pays the pusher to do so because, once hooked, the addict is a captive customer. If drugs were legally available, any possible profit from such inhumane activity would disappear, since the addict could buy from the cheapest source.
Yes, he really said this. He argued that price competition would eliminate any marketing activity that might addict people. Why? Because price competition removes the profit incentive for the pusher.
How about for Madison Avenue? Are we to believe that Madison Avenue is not involved in creating ways to extend addiction? How about cigarettes? How about cigarettes in 1950? Lest we forget, click here.
To understand what was going on here, you must realize that Friedman was involved in marketing. He needed to sell the idea of the legalization of addictive drugs by means of deception. The obvious truth of economics, namely, that price competition will drive down the price of the drugs, thereby leading inevitably to an increase in demand for these drugs, was not something he wanted to emphasize. So, he defined marketers as pushers, and the drug cartel as inhumane. This was all very good marketing, but it was very bad economics.
So, the forbidden fruit effect, for which there is no evidence, and federal restrictions on advertising, which certainly do exist, were Friedman's two main arguments against the obvious conclusion of economics, namely, that with the legalization of drugs, prices will fall, and demand will increase. He added a little rhetorical deception by labeling marketers as pushers, and the drug cartel as inhumane.
What was his evidence, if any, that the legalization of drugs will not increase demand for drugs? He had none. In fact, he specifically provided evidence which proved the opposite, to the extent that historical evidence proves the logic of economics. In this respect, he was true to his defense of inductive is economics, also known as positive economics. It is the economics of statistical verification.
He appealed to the liquor industry in the United States after the legalization of alcohol in 1933. What he showed, beyond all doubt, was that there was a tremendous increase in demand for alcohol, and it was accompanied by a steady decrease in price of alcohol.
What does our experience after alcohol prohibition tell us? In the first three years, as legal beverages were being substituted for illegal beverages, it is not surprising that the reported percentage of all consumption expenditures spent on alcoholic beverages went up sharply. It peaked in 1937, then went down to 1940, then rose during the war until 1945. Thereafter it went down gradually but persistently.
He even provided a nice graph to prove his point.
Where was the "forbidden fruit" effect? Missing in action.
The consumption of alcohol shot up for a dozen years. This is exactly what the logic of economics would have predicted.
Then, as he said, demand fell. He did not explain why. I will explain why.
First, the market became saturated, given the legal codes of the day. This happens with all markets.
Second, this was a period of federal restrictions on advertising.
Third, the liquor industry is heavily regulated. There are all kinds of state restrictions on the sale of liquor. There are county restrictions. Probably most important, there are price floors established by counties and states on the sale of liquor, which decreases the demand for liquor. There are state-run liquor stores that keep out price competition. What competition? Unlicensed liquor stores. There have been plenty of studies on the price of liquor inside those borders and immediately across the borders. In all cases, the liquor stores located immediately across the border, which are not state owned liquor stores, have lower prices and higher sales.
Yet, despite the obvious implications of the record from 1933 to 1945, Friedman waffled. He threw his hands up in mock despair. He said that economic logic does not tell us anything about what would happen after the legalization of drugs and the resultant fall in the price of these drugs. Somehow, economic theory ceases to function. That is what he said.
It's almost impossible to have a confident view about how legalization would affect patterns of usage. Some elements of legalization would tend to reduce the number of addicts, and some would tend to increase it. As to which would be dominant, I have no idea.
In short, when he came to a problem facing his marketing program to sell the public on the idea of legalization, he found that all of his confidence in economic theory somehow departed into the midst of real-world economics. Friedman in this case was a good marketer and a really bad economist.
Then he not only abandoned economics in the name of confusion, he said something preposterous. It is so utterly preposterous that I quote him verbatim, because if I simply told you that he said it, and did not provide the evidence, you would believe I was fudging . . . for marketing's sake. Here is what he said.
Currently, for, example, it pays a pusher of drugs to make a capital investment in creating an addict. He gives somebody a couple of doses free to get him started, because once he creates an addict he has a captive market. Given that the drug is illegal, his customer is likely to stick to him. After legalization on the other hand, it won't pay anybody to create addicts. This undoubtedly would tend to reduce usage.
Got that? Because a drug pusher is part of a drug cartel, which limits access to markets by such things as bullets in the heads of competitors, creates a drug addict, the free market solution to drug addiction is to legalize the drug. Unstated assumption: it won't pay anybody to create addicts anymore. No, no, no, and just to make certain that it does not pay anybody to create addicts any more, we need federal legislation against advertising drugs. As for brand loyalty, it does not exist in the world of narcotics. It may work for every other known product, but not narcotics.
Maybe he was right about the hardest of hard-core drugs. But for recreation drugs, there would be a boom. That is why he wanted controls on advertising.
A HIGHLY SKILLED DEBATER
Friedman lived in a marketer's world. He was a promoter. He was an entrepreneur. Whenever his marketing program required that he drift into incoherence and outright nothingness, this never held him back. He was ready to abandon economic theory, and he was equally ready to abandon anything resembling common sense. It was all part of the marketing program. It was a marketing problem, and there were no laws against falsehood in advertising. So, he did his best to confuse the rubes who might otherwise have been able to follow the logic of economics.
Milton Friedman was a squid. He was a specialist in the use of ink. He used it tactically.
Here is some real dark ink.
The actual cost of producing drugs, whether cocaine, marijuana, or whatnot, is very low. They sell for as much as they do now because of the costs of bribing the relevant officials, making it financially attractive for people to take a chance on getting killed or going to jail, etc. So reducing the costs of bringing drugs to market would result in lower prices, which would undoubtedly have some tendency to increase the quantity demanded. Then there are also different effects on supply, so it is almost impossible to say what the net result would be.
So, "it is almost impossible to say what the net result would be." Therefore, it is almost impossible to say what economics teaches, namely, that a reduction in price will increase the quantity demanded. Friedman was saying: "Forget about economics. This is marketing."
THE BOTTOM LINE
Here is the bottom line. The legalization of drugs will lead to an increase in the consumption of addictive drugs. Price competition guarantees this. This will be made even more likely if all laws on advertising are removed. The idea that this would not take place is simply a marketing strategy to overcome what the voters are opposed to.
The public does not want an increase of addictive drug use. That is why voters favor laws restricting the sale of illegal drugs. To imagine that the drug laws do not reduce the sale of illegal drugs is to imagine that economics is not true. It is to imagine that an increase in price leads to a greater quantity demanded. In other words, it absolutely, categorically, unquestionably denies the logic of free market economics.
I happen to agree with Friedman that there should be a legalization of drugs. I mean all drugs. I mean the drugs that create massive profits for the legalized drug cartel. I mean the abolition of patents. I mean the abolition of all restrictions on imported legal drugs. Along with this, I would also favor the legalization of the sale of addictive drugs -- just as we do with cigarettes.
Why is this? Because I think freedom is better than the state's control of drugs. I think that freedom is a moral issue.
On this point, Milton Friedman abandoned all of his professed commitment to value-free economics and positive economics. He saw it, just as I see it, as a moral issue. He saw it in this sense: we dare not trust the state. The losses associated with trusting the state to regulate markets is greater than the benefits achieved by authorizing the regulation. This is a moral issue. Friedman said so.
Paige: Is it not true that the entire discussion here, the entire drug problem is an economic problem to...Friedman: No, it's not an economic problem at all, it's a moral problem.
Paige: In what way?
Friedman: I'm an economist, but the economics problem is strictly tertiary. It's a moral problem. It's a problem of the harm which the government is doing.
What's this? Milton Friedman, the defender of positive economics, coming down on the side of morality? How could this be?
I think this was marketing. When arguing publicly for doing the right thing, instead of appealing to economic efficiency -- "Cheaper drugs. More drugs." -- he invoked morality. He did not invoke morality whenever he wrote for his peers in academic journals. That was a no-no. That was a breach of academic etiquette. But, when he was trying to sell a difficult idea to sell to the American public, he invoked morality, because morality always sells better than efficiency. He understood his market.
P. J. O'Rourke provides an excellent example of Friedman's commitment to morality. He reports this in his book, Don't Vote: It Just Encourages the Bastards (2010). This appears on page xii. It is an exchange between Friedman and Larry Arnn, the president of Hillsdale college.
Arnn: "Free to Choose is a deeply moral book."Friedman: "Free to Choose is a book of practical economics."
Arnn: "it's a moral book."
Friedman "It's a practical book."
Arnn: "It's a moral book."
Friedman: "I wrote it, and I say it's a book of practical economics."
When Friedman was wearing his academic hat, he was 100% practical. When he faced a marketing problem, he took off his practical hat, and he put on his morality hat.
He understood the efficiency of the free market in mass-marketing addictive drugs, which is why he called for the imposition of federal advertising controls. This was to make certain that the supposedly unpredictable outcome of his recommendation is nipped in the bud. The outcome was completely predictable: more drug sales, more addicts, and "low, low prices!"
How to reduce the drug traffic? Just say no. Ethics is central. So is optimism. Give people legitimate hope. Give them reasons to just say no. This, not a gigantic federal bureaucracy, can reduce drug use.
Tastes can change. Even at lower prices, less will be demanded . . . eventually. Other things -- ethics and hope -- need not remain equal. But this would not happen overnight. There would be a transition period. The use of drugs would rise. Incentives matter. Prices matter. That is why drug legalization is a tough sell to the voters. They prefer invasive bureaucracies . . . and the public schools.
CONCLUSION
Milton Friedman, unlike most economists, was a terrific verbal debater. But, like any debater, he sometimes used rhetorical sleight of hand from time to time to befuddle the issue. It was a matter of winning the debate. It was a matter of marketing.
I liked him personally, but when I debated him publicly, I made sure I watched his hands. When he was dealing the cards, you had to watch his hands very carefully.