Quote of the Day: Prohibition Is The Major Cause Of Crime

Austrian economist Mark Thornton in an interview with the Daily Bell

Prohibition is the major cause of crime. There are the crimes associated with buying and selling prohibited products like heroin and services like prostitution. Then there are crimes and violence associated with prohibition like those related to street gangs and organized crime, such as drive-by shootings, mafia "hits," racketeering, etc. Violence basically replaces the rule of law when markets are prohibited. Prohibition is the fountainhead of corruption. Without prohibition, corruption would be limited to things like elections and government contracts. With prohibition an enormous incentive (due to high prices) is created for black marketeers to offer bribes to law enforcement, the judicial system, bureaucrats and politicians to protect the bribe payer from being caught and punished. In addition, the bribe payer may offer government officials information about competitors, making law enforcement look competent and keeping prices high.

Mark Thornton: How Smugglers Made America

I’ve been saying here that smuggling represents “the unintended consequence of economic and financial repression that constitutes part of the informal economy”. 

And because such collation of repressive legislation “protects the financial and economic interests of the entrenched politically connected few”, smuggling signifies a pushback against these highly oppressive arbitrary policies. 

When seen from the purview of economics, smuggling benefits the the overall economy through the provision of additional supply of goods and services to the consumers, thereby increasing real purchasing power (via lower prices)

Yet not only consumers have been benefiting from smuggling; in the case of rice smuggling in the Philippines, the highly politicized rice economy that has led to massive distortions, ironically has even accounted for as “veiled subsidy to politicians in terms of prolonging their tenure through the attainment of temporary social stability”. Without smuggling there could have  already been a rice/food crisis.

Smuggling has been played a very important role in contributing to the history of wealth accumulation in the US economy. Austrian Economist and Professor Mark Thornton in a book review of Peter Andreas’ Smuggler Nation: How Illicit Trade Made America share elaborates on this.

Here is a slice: (bold mine)

Whenever I receive a book to review that is written by some hotshot ivy leaguer, I brace myself for all the deception and tomfoolery that I will have to endure. Peter Andreas’s Smuggler Nation, however, turned out to be a very pleasant surprise. Indeed, I can recommend this book to anyone interested in a true history.

Reading Andreas’s account we can note first of all that smuggling in America has been around since colonial days and will continue into the foreseeable future. Moreover, smuggling has played a very prominent role — not just a subsidiary one — through our history. Indeed it has often played a pivotal role in important events and historical episodes. And finally, Andreas’s account illustrates how smuggling is the result of prohibitions and protective tariffs. The cumulative impact of these policies has been the driving force for the establishment of big government and the police state in America.

Andreas makes it clear that the policies that create incentives to smuggle are irrational, ineffective, and often counterproductive. He also makes it clear that Americans have been duped into supporting various prohibitions to suppress vice by self-promoting politicians, self-interested bureaucrats, moralistic crusaders, and a compliant press. It is also interesting to note that smugglers were often considered heroes, if not by the majority, then certainly by consumers they served. It is also important to point out that readers will find that many of the wealthy and prominent families in American history, including several of our founding fathers, first grew rich on the profits from smuggling.

Pls read the rest here

Bottom line: The solution to smuggling is to emancipate the marketplace from politicization. In short, embrace economic freedom. 

Video: Mark Thornton on How Silver Money Kept Inflation in Check

From the Mises Blog

Much of the history of Philippine money has been in commodity: gold/silver. This is until the US Congress enacted the Philippine Coinage Act.

Video: Mark Thornton on Real Economic Growth versus Statistical Economic Growth

"Don't be fooled by GDP (3:17)...you've got to be leery of statistics (4:14)"

Video: Mark Thornton on the Unintended Economic Consequences of NSA Spying

Austrian economist Mark Thornton explains of the unintended consequences from National Security Agency's (NSA) rampant spying 

(Source: The Circle Bastiat/Mises Media)

Mark Thornton on How to Read Mises

Interested to learn more about the contributions of the leader of the Austrian school of economics, the late great Ludwig von Mises? 

Austrian economist Mark Thornton at the Mises Blog recommends a step by step 'building process' approach—from easy to technical—to go about the works of von Mises 

October 10th is the 40th anniversary of the death of Ludwig von Mises. He was one of the most notable economists and social philosophers of the twentieth century who created an integrated, deductive science of economics. He based system on the fundamental axiom that human beings act purposely to achieve their desired goals. Mises left a legacy of books and articles that continue to teach and inspire people in a method and science that makes an undeniable case for a society based on freedom and peace.

Many have tried and failed to grasp the enormity of Mises’s contributions. I have been asked many times about “how to read Mises.” For a long time my only answer was “don’t start with Human Action, Mises’s magnum opus. Then, a few years ago, I set out to produce The Quotable Mises where I collected quotes from all his books. This book gives readers quick access to Mises’s contributions and viewpoints. It also serves as a handy tool for researchers and journalists.

It also gave me some insight into the question of how to read Mises. My suggestion now is to begin reading his shorter, popular articles, as well as audio and video lectures on Mises.org. Then proceed to his shorter books like Bureaucracy and Planned Chaos before moving to longer treatments such as Liberalism, A Critique of Interventionism, Omnipotent Government, and Nation, State, and Economy. Next take on the big four Theory of Money and Credit, Socialism, Epistemological Problems, and Theory and History. Finally, you are ready for the centerpiece of Mises’s system of economics, Human Action.

I believe that this approach to reading Mises works because Mises system was comprehensive and cohesive, but his writings represent a building process in which economics is constructed and where concepts are repeated in finer and more elaborate detail. What you might not understand at one level becomes increasingly clear, coherent, and relevant for understanding his overall system.

Here is the list of von Mises' short articles (Some of them are excerpts from his books)

Here is the list of von Mises' books

Video: Mises Institute's Mark Thornton on the US "Government Shutdown"

Mises Institute's Senior Fellow and Professor Mark Thornton clarifies the sensationalism over the alleged "government shutdown" (source Mises Blog)

Does China’s Dubai Project Flop Signify as Signs of the Skyscraper Curse?

More signs of the China’s imploding property bubble. 

From the AFP (including above photo)

It was billed as China's Dubai: a cluster of sail-shaped skyscrapers on a man-made island surrounded by tropical sea, the epitome of an unprecedented property boom that transformed skylines across the country.

But prices on Phoenix Island, off the palm-tree lined streets of the resort city of Sanya, have plummeted in recent months, exposing the hidden fragilities of China's growing but sometimes unbalanced economy.

A "seven star" hotel is under construction on the wave-lapped oval, which the provincial tourism authority proclaims as a "fierce competitor" for the title of "eighth wonder of the modern world".

But the island stands quiet aside from a few orange-jacketed cleaning staff, with undisturbed seaside swimming pools reflecting rows of pristine white towers, and a row of Porsches one of the few signs of habitation.

Chinese manufacturers once snapped up its luxury apartments, but with profits falling as a result of the global downturn many owners need to offload properties urgently and raise cash to repay business loans, estate agents said.

Now apartments on Phoenix Island which reached the dizzying heights of 150,000 yuan per square metre ($2,200 per square foot) in 2010 are on offer for just 70,000 yuan, said Sun Zhe, a local estate agent.

Majestic, grand or ostentatious real estate projects usually highlight the peak of business or bubble cycles. Such has been called as the “Skyscraper curse” as I pointed out in 2009. The rest of Asia, including ASEAN has also been exhibiting the same symptoms

The Skyscraper curse or Skyscraper syndrome, notes Austrian economics Professor Mark Thornton signifies as the “salient marker of the twentieth-century’s business cycle; the reoccurring pattern of entrepreneurial error that takes place in the boom phase that is later revealed during the bust phase.”

It is unclear if China’s Dubai episode has merely been a localized problem.

Instead I would see this as signs of the bursting of her internal bubbles occurring at the periphery which may be in the process of spreading to the core, as explained this weekend.

So far, recent government interventions such as stealth fiscal stimulus and monetary easing has only deferred on the day of reckoning or managed to kick the can down the road.

Yet despite such political actions, China’s retail sales reported rose at the smallest pace in 4 years, and February posted a slump in manufacturing.

Again as noted this weekend, last week China moved to withdraw some of the recent fund injections, as well as, imposed new restrictions on property sales, that may have rattled China’s stock market aside from global commodity markets.

It remains to be seen if China’s political authorities would have the gumption to allow markets to clear that would come with significant economic anguish that may translate to heightened socio-political risks for the incumbent leaders.

My bet is that once the slowdown will become evident anew, policymakers will be quick to reverse on any tightening recently made and flood the system with money. Such has been the du jour policy convention.

Quote of the Day: Why Regulation Does Not Work

Regulations do not make markets safer, more efficient, or work better for consumers in anything but a superficial sense. Regulation only provides “confidence” and assurance that only leads to crisis. Regulation does not produce harmonization of markets or insurance for consumers.

Regulation simply does not work. It is designed with hopes of success, but with no mechanism to achieve this success. We hope for efficiency, but what we get is bureaucracy. We hope for effectiveness, but what we get is rules and red tape that serves neither producer nor consumer. We hope for safety, but what we eventually get is chaos.

This is from Austrian economics Professor Mark Thornton at the Mises Institute.

Professor Thornton cites as examples of the highly regulated financial industry that nurtured Bernie Madoff's Ponzi and the housing bubble. Yes, Washington had “over 12,000 bureaucrats devoted to financial regulation”. 

Professor Thornton also mentions stringent regulations on the oil industry which led to the BP Gulf oil spill and to the Enron scandal.

Professor Thornton concludes: (italics original, bold mine)

The regulator is portrayed as a public-spirited specialist. They know the public good. They know the results that are expected. They know how to bring about those results. It is as simple for them to regulate their corner of the economy as it is for Emeril Lagasse to make crab cakes or for Martha Stewart to make a simple doily.

The public is told that regulators do not cause problems; they prevent them. They police the economy. They are the watchmen that have been endowed with the wisdom, ability, and selfless devotion to the public good.

There are indeed many people who work as government regulators that are very smart and well-trained that have public spirit and the public good in their hearts. There are also plenty of cads and knuckleheads that work as regulators.

The problem with government regulation is that you cannot fine-tune the regulations: nor can you perfect the regulatory work force in such a way to make regulation work in anything but a superficial way. The truth is that regulation instills confidence in the public so that they let down their guard and makes them less cautious while at the same time distorting the competitive nature of firms in the marketplace.

After every economic crisis there are calls for new regulations, more funding, and more controls. Economic wisdom dictates that we be ready to contest those calls when the next crisis of the interventionist state occurs.

Failure of Alcohol Bans in the Muslim World

I have been saying here that prohibition statutes are noble sounding “feel good” political actions that fails to accomplish their goals (in fact they make them worst). Said differently, politics will never eviscerate the natural laws of economics.

The Economist has a terse commentary on the status of alcohol ban on Muslim countries which seem to validate such premises (bold added)

NOBODY knows exactly when Islamic scholars decided that booze was sinful. In the 1970s political Islam led some countries such as Iran and Pakistan to ban alcohol, although many do not and exceptions are made for non-Muslims. In some countries the punishment for Muslims caught quaffing are severe: 80 lashes in the case of Iran. Things may get more arid yet as Islamist parties from Indonesia to Tunisia moot restrictions on alcohol. The number of drinkers varies by country, but some put the total at 5% of those identifying themselves as Muslim. Drinking may even be on the rise. Between 2001 and 2011 sales of alcohol in the Middle East, where Muslims dominate, grew by 72%, against a global average of 30%. That rise is unlikely to be accounted for by non-Muslims and foreigners alone. The black market for spirits flourishes in Libya, while Iranians are adept at producing home brew. Could Islam become more tolerant of drinking? A handful of scholars permit alcohol as long as it is not made from grapes and dates, because these are specifically mentioned in the Koran.

Black markets (and bootleggers) naturally emerge where prohibition laws occur. Yet the article has been reticent about the criminality and corruption related aspects which usually account for as the other forms of unintended consequences inherent to such bans.

I may add that the above data may have severely underestimated the state of alcohol production and usage given that these “illegal” acts are done underground or in the shadow economy.

The more interesting part is that given the apparent failure of the alcohol ban, political authorities appear to be rationalizing (e.g. not made from grapes and dates) the prospective easing of such bans as expressed through opinion of experts.

Prohibition laws fail because, as Professor Mark Thornton argues, (bold mine)

History also supports the finding that prohibition is impossible to achieve in the economic sense. Legislatures do enact prohibitions and establish penalties and enforcement bureaus. The actions of these bureaus to enforce prohibition decrees have an effect, and when a prohibition survives long enough to be enforced it is successful in a political sense. I argue, however, that prohibitions have no socially desirable effect.

Of course prohibition should not be evaluated against a higher standard than other laws. Murder is against the law, but not all murderers are apprehended, convicted, and punished. Likewise, to expect complete or perfect prohibition is unrealistic. Rather, prohibition will be measured against its public-spirited intentions, that is, to reduce consumption of a good in order indirectly to reduce social ills (such as crime, destruction of free will, drug-related deaths) and to promote social goals (family life, democracy, health, and economic development).

To the extent that prohibitions result in increased prices, they produce increased crime and political corruption. Higher prices for a prohibited product also result in the substitution of related products and the innovation of more dangerous substitutes. Prohibited products tend to be more dangerous than legal substitutes in many respects, the result of prohibition, not the product itself.

Therefore, to assume that more severe penalties or increased enforcement will result in the substitution of legal for prohibited products is to make an invalid conclusion.

People dream about a moral society, yet the best way to do this is through free markets.

War on Drugs: US Authorities Launder Drug Money, Corruption Risk Increases

In the war on drugs, the dividing line between prosecuting criminals and becoming part of the crime becomes indistinct

From the New York Times (bold emphasis mine)

Undercover American narcotics agents have laundered or smuggled millions of dollars in drug proceeds as part of Washington’s expanding role in Mexico’s fight against drug cartels, according to current and former federal law enforcement officials.

The agents, primarily with the Drug Enforcement Administration, have handled shipments of hundreds of thousands of dollars in illegal cash across borders, those officials said, to identify how criminal organizations move their money, where they keep their assets and, most important, who their leaders are.

They said agents had deposited the drug proceeds in accounts designated by traffickers, or in shell accounts set up by agents.

The officials said that while the D.E.A. conducted such operations in other countries, it began doing so in Mexico only in the past few years. The high-risk activities raise delicate questions about the agency’s effectiveness in bringing down drug kingpins, underscore diplomatic concerns about Mexican sovereignty, and blur the line between surveillance and facilitating crime. As it launders drug money, the agency often allows cartels to continue their operations over months or even years before making seizures or arrests…

It is not clear whether such operations are worth the risks. So far there are few signs that following the money has disrupted the cartels’ operations, and little evidence that Mexican drug traffickers are feeling any serious financial pain. Last year, the D.E.A. seized about $1 billion in cash and drug assets, while Mexico seized an estimated $26 million in money laundering investigations, a tiny fraction of the estimated $18 billion to $39 billion in drug money that flows between the countries each year.

And in the pretext to trap the criminals for evidence, officials themselves induce or encourage the engagement of such ‘criminal’ activities.

Yet the article does not only skim over any potential conflict of interests and the increased possibility of corruption that emerges from the aforementioned police operations, but also ignores the skewed priorities undertaken by officials in following the drug money which leads to more crimes.

Nevertheless what has been obvious is that the war on drugs has been a massive failure. Instead, the war on drugs has resulted to the swelling of the drug trade and surging number of drug related deaths.

Chart from Professor Mark Perry

Drug money laundering by US authorities has corrupted many officials. This can be deduced from the enormous difference between seizures and drug money flows, considering that US narcotics agents have functioned as significant operatives for drug laundering operations.

Corruption is the innate socio-economic response to any prohibition laws, be it drug, alcohol or anti-mining laws or etc…

As Professor Mark Thornton writes, (The Economics of Prohibition, p.131)

Corruption is a function of the price of the prohibited product. As enforcement increases, the price of a prohibited product and the costs of avoiding detection rise relative to the basic costs of production. We should expect that suppliers would be willing to pay to reduce their risk. A higher price involves both a greater risk of apprehension and a greater incentive to provide monetary payments to public officials.

As enforcement increases, the risk of apprehension rises and the quantity of output decreases. The divergence between price and the basic costs of production increases. Increased enforcement therefore increases the ratio of costs of risk to the cost of production. The result is an increased profit opportunity for entrepreneurship in avoiding detection. Many avenues exist by which entrepreneurs can reduce detection risks. They can use faster boats and planes, smaller and easier-to-conceal products, or deceptive packaging. One way to shift the burden of risk is to corrupt the public officials charged with the enforcement of prohibition. As enforcement efforts increase, corruption (like potency) will gain a comparative advantage in avoiding detection over transportation, technology, and deception.

We therefore expect corruption to increase with increased enforcement efforts, whether or not total revenues in the industry increase. This assumes that the underlying demand for the product, penalties for both prohibition and corruption, and the efforts to reduce corruption are held constant.

So the unstated motto of US drug officials seem to be “if you can’t beat them, join them”, just camouflage them with entrapment operations.