Against Half Baked Legalization

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I’m an advocate of drug legalization. I believe that drug prohibition has not worked to curb drug consumption, and, in fact, that it has driven drug consumers to more harmful substances (see, for example, Mark Thornton’s, “What Explains Crystal Meth?“). I question the legitimacy of forcefully limiting drug consumption, in the first place. I’m also of the opinion that if drugs were legalized, competition would drive the quality of drugs up. This includes gradually making them less dangerous, or developing better substitutes. But, are all changes towards full legalization equally as good? Half steps may actually make the path towards legalization more difficult than they otherwise would be. California provides a perfect case study.

In 2010, a ballot initiative was introduced to legalize marijuana. Specifically, the law would allow persons 21 and over to hold up to 28.5 grams of marijuana and the ability to grow small amounts of the plant at home for personal use. It also would open the drug to taxation and wholesale commercial production, by licensed firms. More information on the initiative is available on Wikipedia. Prop 19 failed to pass the elections, with 54.5 percent of Californian voters choosing “no.”

According to one poll, 52 percent of Americans support the legalization of marijuana. If we take this as a cross-country mean, my guess is that the statistic for California is marginally greater than or equal to 52 percent. So, why did Prop 19 fail at the ballot? One explanation is that there was insufficient advertisement of the initiative, implying that those who did vote were a non-random sample of Californian voters — that is, the voting population was biased against marijuana. I think this probably has some truth to it. It’s also true that California has a significant population of conservatives, so the typical belief that California is a relatively liberal state may not always be true. But, another major impediment to the initiative’s passing was the fact that California growers, who supply the medical marijuana industry, opposed the legalization attempt.

California has a large market for marijuana. Much of it is legal, thanks to the legalization (Prop 215) of medical marijuana in 1996. California dispensaries are supplied, in large part, by local growers. A more comprehensive marijuana legalization threatened to depress the price of the plant, for two major reasons,

  1. It was expected that the number of suppliers would increase;
  2. The legalization of limited personal production would have decreased demand for suppliers’ product.

Current cannabis growers are not interested in competition or falling prices, because it means a loss of market share and profits. Thus, in California, they put a lot of money, time, and effort into blocking the passing of Prop 19. Had the marijuana industry been behind the initiative — or, even, neutral —, I’m sure Prop 19 probably would have passed.

This brings up the question of whether we should be careful when proposing incremental legislation, with the long-term objective of full legalization. In California we see that the legalization of marijuana created a new marijuana industry, and the profitability of this industry created an incentive for the industry to oppose further legalization. I don’t know the details of how California’s growers opposed Prop 19 very well, but, whether indirectly or directly, the creation of the industry created the opportunity for rent-seeking, and this has hurt the chances of full legalization. Now, public opinion has to change to a sufficient degree to overcome the industrial opposition, and Californians have to deal with the risk of voting for diluted future propositions, with terms that may be more favorable for current cannabis growers.

In other words, it may be a superior strategy to just wait for the right time to push for full legalization, because in our current environment there’s too much of a risk of unintentionally creating entrenched interests that actually hurt your long-term objectives. It’s really too bad, because marijuana is one of those goods where it no longer makes much sense to prohibit it. In California, I don’t think it’s a stretch to claim that over 50 percent of residents have consumed weed (I’d put the figure closer to ¾ of total residents). It’s already accepted in our popular culture. By now, in my opinion, a progressive society would have fully legalized it. But, a premature medical use legalization has put at risk short term legalization for the sake of a very limited gain — you’re almost just as well off continuing to buy the drug illegally, since the prices and quality are about the same.

This is something other states should definitely consider when they start to discuss the legalization of marijuana in their own legislatures. In some states, such as Colorado and Washington, the time may be ripe to just try full legalization (although, maybe not). But, in other states the odds may not be so favorable. In these states, it may be worthwhile just to wait for the right time, rather than opt for half baked measures that may make legalization more difficult in the long-run.

Advocates of Reason: 9 May 2013

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 Man has only one tool to fight error: reason.

— Ludwig von Mises

1. A ghostwriter (not me) cites an old Mises Daily of mine. A tip: I don’t recommend posting your essays on these kinds of websites. You’re not going to make much money ghostwriting, unless you upload a huge volume of papers. Instead, you should approach it like a business, advertise, and write unique, fresh papers for all your clients. It pays off; you make much more money this way (I would never sell a ~4,000 word essay for $70). Another tip: don’t buy essays from these websites. A lot of professors simply copy and paste entire essays into Google to discover plagiarism, and the tactic works very well. Essays from websites where parts of the essay are published, so that the client can take a look at the quality prior to purchase, are especially susceptible. In any case, you commonly need to establish a temporary dialogue with whoever you hire, because you will get feedback on your essay and you will need someone to make the necessary changes. Final tip: honestly, write the essay yourself.

2. Chris Dillow, “A Case for Inequality,”

Instead, the causes of inequality lie in institutions and ideology. On the one hand, the US has institutions and ideologies which engender “winner take all” markets in which CEOs and “superstars” — of either an Adler (pdf) or Rosen (pdf) type — can get very rich. On the other hand, Scandinavians have strong welfare states which reduce income inequality but – by deterring saving amongst the middlingly poor – increase wealth inequality.

The first sentence is key. The theory of distribution abstracts from institutional concerns, but it’s really institutions which determine the distribution of income. This is why I spend so much time criticizing “productivity” theories of inequality. Accepting this doesn’t make you a “statist,” or a “Keynesian.” You can take a Hayekian position, admit that institutions are imperfect, and argue that the best institutional improvements arise spontaneously through decentralized decision making.

3. Matt Zwolinski on why he isn’t an anarchist,

Anarchism of this sort thus demands from us an enormous confidence in the power of human reason to radically redesign and improve evolved social institutions. And it is precisely this sort of confidence that classical liberals have long warned us to be wary of.

This sound similar to the argument I made here. The whole piece (plus the earlier essays in the same discussion) is worth reading.

4. Atlético de Madrid, the team I have been following almost since I was born, has directly qualified for the Champions League for the first time in 17 years (we qualified for the atletico madrid plato campeones2007/08 and 2008/09 Champions League seasons, as well, but only through playoffs). If it sounds unimpressive, consider the fact that we’re Spain’s third most decorated team. Historically, we’ve fared pretty poorly in Europe’s top competition, but I’m hoping that with Diego Simeone — a manager that has won us two pieces of silverware, and qualified us for the domestic Cup final, in his year and a half so far — Fortune will shine upon us. By the way, I still remember receiving a commemorate plate (for winning the league and the domestic cup) from a family friend when I was nine years old. He’s a culé (Barcelona fan), but he knew how crazy I was/am about the team. It’s weird because I’m the only Atleti fan in my household. My grandfather is a Madridista (Real Madrid fan), and a pretty die-hard one at that.

5. I wonder if, in some stateless parallel universe, every time private defense fails to solve a crime a blogger writes, “Wow, if we had publicly funded police none of this would happen!” Then I wonder if some obscure blogger writes a blog post on how radical statists should be more skeptical, because publicly funded police stations can only work if they appear spontaneously.

What’s So General about the General Theory?

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Bruce Bartlett considers the title of John M. Keynes’ magnum opus, The General Theory of Employment, Interest, and Money, an “unfortunate error.” According to Bartlett, Keynes’ core insight is the liquidity trap, which he defines as a situation where both inflation and interest rates are low, making bonds and money close substitutes. Thus, Keynes’ economics are mostly applicable only when an economy is in a liquidity trap. I think Bartlett has it mostly wrong. The liquidity trap only plays a small role in The General Theory, and the book’s major contribution — at least, as intended by Keynes — is its business cycle theory.

If you’re wondering what the liquidity trap is, I give an overview of the development of the theory in a June 2010 Mises Daily, “Krugman contra Hayek.” Most of my overview is based on a paper by Mauro Boianovsky, “The IS-LM Model and the Liquidity Trap Concept: from Hicks to Krugman.” A modern interpretation of the liquidity trap theory is provided by Paul Krugman, in his 1998 paper on Japan. Krugman’s definition is a bit more general: when conventional monetary policy no longer stimulates, otherwise known as the zero lower bound (ZLB).

How big of a role does the liquidity trap play in The General Theory? In Keynes’ 1936 book, the liquidity trap is mentioned, in passing, in chapter 15,

There is the possibility, for the reasons discussed above, that, after the rate of interest has fallen to a certain level, liquidity-preference may become virtually absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest.

— p. 207.

Keynes suggested, with healthy skepticism, that the early 1930s may be an example of a liquidity trap, but that these cases are indeed very rare. It certainly is not the centerpiece of Keynes’ theoretical exposition. In fact, the liquidity trap is probably better identified with John R. Hicks (who later repudiated much of his work from “Mr. Keynes and the Classics“), who also introduced the IS/LM diagram taught in intermediate macroeconomics. In any case, none of the theories that Keynes developed in his book were specific to the liquidity trap, nor require the liquidity trap as a precondition for their validity.

Keynes’ main argument, in my opinion, consists of an integration of R.F. Kahn’s multiplier with the macroeconomic framework Keynes began to develop in his A Treatise on Money (and volume II). The main purpose of The General Theory is to explain how an underemployment equilibrium may arise, and Keynes’ theory is that cyclical fluctuations are caused by increases in the stock of savings which cannot be met with greater investment. The theory is similar to monetary disequilibrium, but rather than an increase in the demand for money and sticky prices, the shock in aggregate demand is caused by a sudden reversal of entrepreneurs’ expectations (more on the differences between the two theories here).

The most well known term associated with Keynes is “animal spirits,” but at first he actually frames his theory as a secular outcome of economic growth. As an economy becomes more productive and incomes grow, the propensity to save tends to grow at a faster rate than the marginal propensity to consume. In other words, the proportion of saving to consumption increases over time. A tenet of the Keynes–Kahn multiplier is that present investment is directly derived, by and large, from present consumption. As consumption falls, the scope of investment falls, and vice versa. It follows that at some point savings is bound to increase beyond the point it can be profitably invested, causing an aggregate demand shock. Drawing on “animal spirits” helps with the application of this theory, since recurring waves of optimism and pessimism can cause the sudden changes in expectations that leads to a shortage of investment. But, “animal spirits” is not a central component of the “general theory.”

In the course of explaining his theory, and its many components, Keynes offered two main challenges to what he termed Classical economics. The first, early on, is that wages aren’t sticky, rather they may not be able to fall in real terms, at all. He posited that since labor makes up a significant portion of the costs of production, a nominal reduction in wages will lead to a proprotional nominal reduction in the price of output, leaving real wages the same. By doing this, he circumvented the typical explanation for mass unemployment: the artificial rigidities created by interventionism. Second, he engaged the believe that savings and investment is well equilibrated by the rate of interest. He argued that the interest rate is not only determined by time preference, but also by liquidity preference — interest on non-cash assets have to include a premium to make up for their relative illiquidity. If a high liquidity preference increases the rate of interest well beyond its equilibrium, or natural, level, there will be some discoordination between savings and investment, leading to or aggravating a demand shock.

What’s the general theory, then? All of this is explained within the context of a novel macroeconomic framework. Keynes was advancing a theory of the coordination of several macroeconomic aggregates: investment, savings, consumption, interest, et cetera. He argued that capitalist economies are prone to demand shocks — not under special circumstances, but generally. And, actually, referring to Keynes’ theory as a business cycle theory may be somewhat misleading, because the business cycle theory is really only secondary to the macro framework Keynes was attempting to construct. That is, demand shortages are only a part of the broader theory of Keynes’ vision of how economies work on aggregate: investment, and therefore employment, is determined by the expected demand for final output. Keynes relegated supply-side considerations to the back burner.

Maybe by “core insight” Bartlett means the key concept that economists took from Keynes. But, even then, I think he’s wrong. The key, and in my opinion erroneous, belief is that present demand for consumers’ goods output determines the scope of present investment, especially without considering supply side qualifiers that would radically change the implications of Keynes’ general theory. It’s this idea that informs the opinion that consumption drives the economy (and that to restore aggregate demand we must stimulate consumption). It’s this relationship which is one of the most important facets of Keynes’ general theory of macroeconomic coordination.

Also, briefly, I’m not sure just how skeptical of monetary policy Keynes was. I recommend two papers on the topic: D. Moggridge and S. Howson, “Keynes on Monetary Policy;” and E. Dickens, “Keynes’s Theory of Monetary Policy.” Also, Hicks discussed some differences on monetary policy between Keynes and Ralph Hawtrey, in his book Economic Perspectives.

The Error of Latin American Market Reform

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Left Behind (Edwards)In the story of Latin American economic reform, then, one variable more than any other plays a crucial role. It is not inflation, wages, or economic growth; it is not privatization or the extent of openness and globalization; it is not even foreign debt. The key variable is the exchange rate, or the value of the local currency — the peso, the bolivar, the quetzal, the real, or the córdoba — in relation to the United States dollar. Repeated mistakes in exchange-rate policy will be singled out as the most important cause behind the region’s economic travails, the waning support for modernizing reforms, and the eventual revival of populism during the twenty-first century.

— Sebastian Edwards, Left Behind: Latin America and the False Promise of Populism (Chicago: University of Chicago Press, 2010), p. 142.

The problem that Edwards brings to our attention is the seeming inability for a fixed exchange rate regime to coexist in a country with independent monetary policy. In a floating exchange rate regime, a fall in the value of a currency will also manifest itself in the exchange rate — the currency becomes cheaper relative to others. If the price of local currency is fixed, however, internal inflation will cause it to become overvalued relative to foreign currencies. This discourages export-oriented growth.

But, the currency and debt crises that struck Latin America in the mid- and late 1990s was more than just a price fixing problem. Latin American assets (except for debt denominated in foreign currency) also required currency exchange to take place, and so the artificially overvalued local currency should also impact capital flows (or, at least, the kind of assets held). But, inflationary environments tend to correlate with — and/or cause, I think — asset price booms, so holding these assets becomes attractive. Most Latin American countries were running large trade deficits, meaning they have capital account surpluses. In my opinion fixed exchange rates in an inflationary environment is part of the problem, but not the whole story.

Guns and Crime

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Following tragedies like shootings, the demand for gun control usually rises. A common objection against greater gun control is that criminals don’t follow the law, and so gun control will only place a greater handicap on law abiding citizens. This isn’t necessarily true, and I can illustrate it with the following two graphs,

Demand Curve Elasticity Gun Control

If we deaggregate the criminal population into two sub-samples, we can see how two different classes of would-be criminals react differently to changes in gun laws. The graph on the left represents supply and demand of guns for “non-professional” criminals. These are people who may be mentally ill, or just happen to be in a state of mind where criminality is likely, but where such criminality isn’t a part of their normal life. Your typical school shooter probably belongs in this group. The graph on the right illustrates demand and supply of guns for “professional” criminals, who are people who earn a living from crime (crime is a normal part of their lives). I don’t think it’s a stretch to assume that the latter group’s demand curve will be inelastic, relative to “non-professional” criminals.

If we assume that more gun control will increase the price of gun acquisition, then we can see that gun control will have a greater effect on “non-professionals.” It’s determined by differences in the elasticity of demand. What elasticity of demand refers to is how the demand for some good will change as the price changes. What this implies is that gun control may indeed be a way of reducing certain kinds of gun violence, like school shootings.

The next relevant question is how gun control impacts defense against “professional” criminals, because the ratio of “civilian” gun ownership to “professional criminal” gun ownership will fall (the former falls to a greater extent than the latter). It may be that the costs attached to a falling civilian to professional criminal gun ownership ratio are greater than the benefits derived from less “non-professional” crime. This is an empirical question, and I don’t have a good handle on the empirical evidence. I’ve seen arguments go both ways: those on the right tend to claim that the data supports them, and those on the left argue the exact opposite. I am biased by the historic inability of the right to make good arguments on these kinds of issues, so I’m more skeptical of the right’s claim — but, the fact is that I really don’t know.

However, I think that reliance on guns amounts to a prehistoric method of the maintenance of peace and order. This isn’t to say that force isn’t sometimes necessary, and that weapons make the use of force more effective. My point is that we have also developed institutions that minimize the need for violence. Arguing for less gun control, in a sense, is putting institutions on the back burner. One reason to do this is distrust of the state, but if we had stateless institutions I doubt that society would be gun control free. In fact, some of the evidence suggests that I’m right. For example (although my memory may be failing me), during the early decades of the U.S. occupation of what is today the mid-Western U.S., it wasn’t uncommon for local law enforcement to restrict the carrying of firearms within the territorial confines of the town.

As institutions evolve, and guns become less important to the enforcement of the rule of law, it makes sense to implement marginal changes in gun control. Society may decide that the benefits of some gun control are greater than the costs. This not only applies to crime, but also to tyranny. As the institutions of governance evolve, so do the means of checks and balances. If guns aren’t as necessary to control the encroachment of the state as they were in the past, we can sacrifice some diminishing sense of security in that area for greater security in other areas (e.g. lowering the crime rate).

It’s also important to realize that gun control doesn’t necessarily mean stripping society of all its guns, and monopolizing the right to the use of arms. It simply means restricting the availability of certain guns to certain people. Not very many people, excepting perhaps extremely uninformed liberals (which must exist, just like extremely uninformed conservatives exist), advocate the corner solution of complete gun control. There’s no reason to implement the extreme defense of “they want to take away all of our guns!” (Although, I’m sure there are people who do; but, we live in a reasonable society, where the average opinion lies somewhere in the middle.)

Edit: The anti-gun control evidence usually looks something like this. These small data sets are susceptible to omitted variables, and so what looks like a straight forward story may not be so straight forward. I’ll have to research for more robust empirical tests.

Edit 2: It’s also worth considering that there are various means of reducing crime. Even if some gun control leads to a net benefit, it doesn’t mean that this level of gun control is optimal. It could be that alternative means of crime reduction suffer from lower opportunity costs.

Quote of the Week

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The Myth of the Rational Voter)Caplan)[I]t is not true that private action is inherently parasitic or dependent upon collective action. The existence of the black market proves that property rights and contracts are possible without government approval. That is why one drug dealer can meaningfully tell another, “You stole my crack” or, “We had a deal.” Indeed, the black market shows not only that property and contract can persist without the government’s support, but that they can survive in the face of its determined resistance.

— Bryan Caplan, The Myth of the Rational Voter (Princeton: Princeton University Press, 2007), p. 194.

One big objection to this argument, that I can think of, is that enforcement of property rights in black markets tend to be sub par. The reason is because it’s difficult to build long lasting institutions when you operate in a sector where these institutions can be dissolved by the state. But, the point remains that the black market does not offer a lot of evidence of efficient, non-state property rights protection. Another thing is that we don’t necessarily need to see the emergence of property rights as a function of government benevolence. Rather, maybe early societies developed early governments expressly for the purpose of rule enforcement — that is, maybe the existence of government is due precisely to the lack of other, better alternatives for the provision of order (in early society).

Stupidest Man Alive

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I apologize to Brad DeLong for taking the name of his “award,” but it’s for a good cause,

Harvard Professor and author Niall Ferguson says John Maynard Keynes’ economic philosophy was flawed and he didn’t care about future generations because he was gay and didn’t have children.

— Tom Kostigen.

Edit 1: Actually, DeLong has already commented on this, tracing the claim to Gertrud Himmelfarb.

Edit 2: Nial Ferguson apologizes. I don’t doubt his sincerity, but what possible cost-benefit analysis could have led him to make those remarks when he did?