Economic Ignorance

The essence of the economic order is the price system. Without it, as Ludwig von Mises demonstrated in 1920, society is doomed to mass starvation.

Even the KGB and the Gulag couldn't entirely wipe out the price system, so the U. S. S. R. managed to stagger along, but only through suffering and bloodshed.

Our own Gosplan, the U.S. Congress, hasn't been as extreme, thanks to the American people and our traditions of liberty. But it's still the biggest collection of economic meddlers and ignoramuses west of Moscow.

When the price system functions freely, it brings supply and demand into rough equality, ensuring that resources are put to their most-valued uses. To the extent that government meddles with prices, it creates waste, hampers entrepreneurship, and makes people poorer. That's true with energy and natural resources; perverting the price system even makes our drug problems worse.

If tomatoes – for whatever reason – become scarcer, their price goes up, which tells consumers to eat less. If more tomatoes come on the market, their price goes down, telling consumers they can eat more. Prices thus constitute a system of resource conservation.

But Congressmen pretend – exactly like Soviet central planners – to know economic values without prices, as we can see in the recent frenzy over oil prices. They denounced "price gouging" while planning tax gouging, including new energy taxes designed to raise the price of gasoline!

The recent hysteria over African elephant tusks was another problem of prices and property rights. If people were allowed to raise elephants and sell their tusks – as even the socialist government of Zimbabwe pointed out – there would be no more and no fewer elephant tusks than there should be. The same principle applies to all other resources. If left in common ownership, there will be misuse. If put in private hands, we will have the right amount: supply will meet demand.

An example of market response in the animal market was the Cayman Turtle Farm in the British West Indies. The green sea turtle was considered endangered, thanks to overharvesting due to common ownership. The farm was able to hatch eggs and bring the hatchlings to maturity at a far higher rate than in nature. Its stock grew to 80,000 green turtles. But the environmentalists hated the Cayman Turtle Farm, since in their view it is morally wrong to profit from wildlife, and they drove the farm out of business. The green turtle is again on the endangered species list.

Liberals justify government intervention in the price system because of "public goods" and "externalities. "

A public good is supposed to be something we all want, but can't get unless government provides Environmentalists claim everyone wants national parks, for example, but the market won't provide them, so the government must. But how can we know, independent of the market, that everyone does want these expensive parks? Or how many parks of what sort?

We could take a survey, but that doesn't tell us the intensity of demand. More important, it's not enough to know that people want, for example, diamonds. We would have to know if they are willing to give up other things to obtain them, and we can only know that by watching their actions in a free market.

If we realize that only the market can give us economic information, the alleged problem of public goods disappears. Absent government prohibitions and subsidies, or competition from "free" parks, the market will ensure that we have exactly the number and type of parks that the American people want, and are willing to pay for.

An externality is a side effect. Your neighbors' attractive new garden is a positive externality; their barking dog is a negative one, One is a blessing, the other an irritant, but you voluntarily purchase neither.

Environmentalists claim, for example, that trash is a negative externality of consuming, so they advocate government suppression of "wasteful" consumption. Yet the free market handles this justly and efficiently through property rights. Privatize everything and the externalities are "internalized," that is, those who ought to bear the costs do.

Making a product such as drugs illegal hampers this process. Given the incentives, there are no measures severe enough to suppress the trade. Even within the federal prisons, where the criminals are all in cages, there's a lucrative drug market.

A Bush administration official says that one of his goals is to raise drug prices. But what do higher drug prices mean? Higher profits for the drug dealers.

Simple economics teaches that if the price of drugs is driven higher, and the costs of production and consumer demand remain the same, drug producers and distributors can pocket the difference. In economic jargon, the marginal revenue of drug sales already outstrips the marginal cost of production by an artificially huge margin. Profit differentials reach 2,000% in some drug markets!

Higher prices also mean that users will steal more money to buy their drugs – more robbings, beatings, killings, and break-ins in cities across America. Last year drug users stole more than $7 billion from innocent Americans. Higher prices will guarantee an increase in that figure.

The high murder rate in the inner-cities is also a direct result of drug laws that make the peaceful settlement of disputes impossible. Drug laws have insured the continuance of a market that relies on violence and the threat of violence.

Tougher law enforcement is not a sufficient deterrent. Pushers already face the prospect of imminent death when they step out onto the streets to sell their goods. As long as a ghetto kid can earn $4,000 a week selling drugs, he will continue to take the risk.

That leaves decriminalization, which would subject the drug industry to full market discipline. Drug prices would plummet, profits would crash, and street crime would drop – by 75% according to some estimates.

This wouldn't create a utopia, but that is not one of our options. Once the violence stops, we can focus our energies and resources on private treatment for those who want to stop, and private anti-drug education for the young.

But we should not spend any public money on treatment or education. Some liberal legalizers want the billions now spent on enforcement channeled into government-run clinics. About 80% of treated addicts return to drugs within a year, however, showing that the problem is not lack of treatment.

Some people are natural addicts, who will harm themselves with drugs. There's nothing the rest of us can do about it, except prevent them – through decriminalization – from spreading their misery to the rest of society.

It would be nice to have another choice, but the laws of economics do not allow us one.