Addiction
Waiting for the Man
Millions of people around the world every day engage in substance use and abuse. What is it that drives an addict, and what do the principles of economics have to say about the phenomenon of addiction?
A major assumption about the principle of demand seems to mirror the philosophical concept of hedonism. People have infinite wants, but the condition of the world is one of scarcity. Since we can’t have everything, we are willing to substitute one good in exchange for another. While these preferences may vary by individual, on the aggregate these preferences compose the demand curve. Economics also supposes that human beings are rational, and that they instinctively take actions within their scarce resources to take actions which maximize benefits at the lowest possible cost. In our discussions of cost, we've always been careful to point out that it is not simply costs that can be illustrated in dollar terms, but social costs as well.
Does that mean users and abusers of alcohol, tobacco, caffeine, narcotics, various prescription drugs, and just about anything else you can imagine (and even some you never would have imagined, but can easily watch on A&E’s ‘Intervention’) are immune to the assumption of rational behavior? Is it irrational to engage in these self-destructive behaviors, or does the struggle against addiction fall clearly between the lines of a rational economic analysis? The Ambidextrous Economist will argue that everyone is still being rational, even when she has one hand in her pocket, and the other one is flicking a cigarette.
Event Horizons
Clearly there is a disparity someone who choose a straight edge lifestyle, swearing off the use of all things with addictive properties, and that of the drug-addled rock star who swears at everything but doesn’t mind using all things in excess. These types of folks make different choices, and what seems rational for one appears irrational to the other. How can acts that are self destructive in nature be rational?
A great deal of the disparity goes into the assumptions about quantity versus quality, and each of these play out against an unknown time factor. There are some outlying questions that are based on underlying assumptions. How much consumption will make someone feel better? When does taking too much of a substance turn from a recreational pastime into the only thing they end up doing with their time? Unfortunately, this is a calculation that the addict, by definition, never gets right.
It's an interesting characteristic of the younger generation that many youths don’t believe in saving for a 401K, buying a home with a 30 year mortgage instead of renting month-to-month, or even taking the time to make the bed in the morning. The time horizon used in their estimates is shorter in scope than someone gearing for their golden years and who intends to live for a long, fulfilling retirement. Maturity can arguably be defined as forsaking immediate gratification for the prospect of long term gratification. But the time value of money, the primary pillar by which finance is based, proves that money today is worth more than money tomorrow. If given the choice, investing money that one could spend on drugs could be used to by more drugs in the future if in fact more drugs tomorrow is preferable to drugs right now. There is a point of diminishing returns when using more drugs is no longer 'recreational', and can potentially drive the user to overdose or die. Albert Einstein, who would warn the U.S. Government of his native Germany’s intention to create the seemingly unmatchable force of the atomic bomb and nuclear warfare, was once asked what the most powerful force known to man was. His answer: Compound interest. The phenomenon of money gathering interest on interest earned in a savings account is eerily similar to the increasing rate that the addict’s drug of choice exacerbates her need to spend money to procure drugs and increasing time and risk assumed to consume that drug.
Someone once said, “I know smoking kills. At least I’m going to die doing something I like.” These kinds of rationalizations are usually after the stranglehold of addiction has set in, and the rationalizations are a defining characteristic of the disease. But the premise of this person’s argument had an argument grounded in logic, too. No one lives forever. And it isn’t immediately apparent that a long life is equivalent to a good life, or even that the two are correlated. Now that may not be excuse to engage in self destructive behavior, but it leads to a great deal of insight into the decision making process of what psychologists sometimes refer to as the ‘invincibility delusion’. The main point here is that short term and long term decisions are often in conflict. When people have different ideas about event horizons, their decision making is bound to favor either immediate gratification or long term health. Another cigarette won't kill me... but then again, it just might.
Prohibition
The Puritan policy of prohibition did not work with alcohol, and there is a multitude of evidence available to suggest that prohibition in the War on Drugs first launched by Richard Nixon is losing cause. A surprising majority of the academic literature argues for legalization, where much of the analysis compares the cost of incarcerating non-violent drug offenders versus the societal benefit of waging a losing battle. But a preponderance of state-sponsored research typically argues for treatment and the continued enforcement of existing laws. This kind of self-interested pedagogy makes sense. Would a Drug Czar or his staff initiate the demise of his livelihood by endorsing legalization? Of course not. This demonstrates the propensity for bureaucracies to overspend in ways that are less than efficient. It also supports the notion that agency problems are rampant in the public sector as much as they are in the private sector.
Prohibition of some narcotics is beneficial for some parties, and those parties happen to have a great deal free cash flow to spend on political influence. The pharmaceutical industry relies on revenues protected by patented medicines, some of which are legalized narcotics. By their very nature, patents are monopolistic, at least as long as the company is legally able to hold their market power. Typically in the U.S., patents are good for twenty years. That means prices for pharmaceuticals are bound to be untenably higher than what would benefit society as a whole. Despite arguments that the proceeds from these modern medical wonder drugs go to research and development, more evidence exists that the bulk of pharmaceutical wealth is used to enrich shareholders and support large scale advertising efforts to increase use of medications that people might not necessarily need.
This begs the question: Why are some drugs protected by the government and some outlawed outright? Why hasn’t the Federal Government done more to cut down on prescription drug abuse, the leading cause of drug-related deaths? Why does society tell us in one instance we should just take a pill, and that taking another kind of pill is entirely the wrong thing to do? For a thoughtful discussion of this topic, please consider what Howard S. Becker has done with Labeling Theory, starting here:
Since the trade of certain narcotics is restricted or banned altogether, this automatically ensures that a black market will emerge, as rumrunners and speakeasies popped up in droves when Congress passed the 18th Amendment. This precluded the United States and the states themselves to collect sales or income taxes related to alcohol. That opportunity cost for the state accrued directly to the pockets of organized crime, further inciting gang violence. Government’s revenue generating loss essentially became the cashflows that bootleggers were able to use to Tommy Guns and bribes for corrupt public officials paid to look the other way. Those same dollars, in terms of opportunity cost, could instead be used on treatment and preventive educational efforts. Instead of minimizing the costs to society, the incarceration of drug offenders puts them at odds with the government, leaving the government with the both the violence and increasing costs of incarceration as well as the unintended effect of creating allure and glamor for the ‘counterculture’ lifestyle. Economics practitioners are quick to remind us that the effects of public policy is not just about the immediate aftereffects of legislation, but more importantly the compounding effects of the structural changes that occur through whole industries after the initial shock subsides. We all know how the story of Prohibition of alcohol ended, as Congress passed the 21st Amendment to the Constitution, effectively repealing the 18th Amendment.
Shades of Gray
In many states, marijuana has been legalized for medicinal use. This has given rise to a gray market. The Federal Government still considers pot illegal, but state police forces where voters have chosen to legalize weed are by law bound to look the other way if someone has the paperwork from a doctor that authorizes them as a patient who could benefit from the medicinal properties of the drug. So states collect tax revenue from dispensaries who provide caregiver services are collected by the state, even the Federal Government gets income tax from the owners and employees of the dispensaries. But the growers of marijuana, because of the gray market, have remained mostly underground. Possessing seeds is legal, but growing may or may not be legal dependent on state and local laws, and in eyes of the U.S. Government, it’s all illegal. But the burden of funding the prohibition of marijuana has shifted from the states that have legalized cannabis to that of Federal law enforcement agencies, as have the compounding economic factors making prohibition harder and cost more to enforce.
The debate over prohibition and legalization is not one that is apt to end anytime soon. What is certain is that the burden of cost has shifted from the states to the Federal Government. In short, the cost cutting by state governments, in addition to the increasing amount of voter-approved legislation to limit criminal fines and incarcerations with constructs such as drug courts, judicial off-shoots that are more inclined to require treatment as opposed to jail time, has necessarily forced the United States government to pick up the enforcement of narcotics laws, which means Uncle Sam is footing the bill. Federal Agencies, for their part, have been forced to shift their resources toward protection against terrorism, which is largely funded by the illegal drug trade, and trying to stop dealers at the street level. Increasingly, the cost prohibitive nature of drug enforcement, including the likely political costs associated with decriminalization, suggest that the status quo bias and black and gray markets will continue to rule the day for some time to come. As a result, a conflagration of externalities is likely to persist: Addicts will cause undue costs to society (corrections, judicial, public safety); Organized crime will reap substantial, untaxed revenues supported by illicit manufacture and transport as well as territorial violence; Taxpayers will continue to support law enforcement efforts they might not necessarily agree with; Governments will continue to implicitly endorse large pharmaceutical companies ability to limit the available healthcare choices available to patients while charging untenable prices for drugs people might not necessarily need.
Whatever the moral arguments are for prohibition or decriminalization, the economic indicators suggest that anything but the status quo would be a welcome change for the better.
AE - 08.14.2011
The Ambidextrous Economist is double fisting. He can be reached at AmbidextrousEconomist@gmail.com.