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.


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.


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.

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