Tracing consequences both seen and unseen.
Wirkman VirkkalaThe Giffen Weed
Posted at 12:27 pm on March 24, 2010, by Wirkman Virkkala

John W. Payne’s contribution, yesterday, on this very blog, “More Bans Won’t Deter Use, but Will Increase Costs,” raises a serious issue directly tied to the theme of this blog. The issue is Supply and Demand — that is, the working out of incentives and disincentives throughout the vast network of individuals that makes up society.

People sort of understand that if you raise the price — or, by legal interdiction, radically increase costs — of a good, use of that good should go down.

This is, after all, a standard economic notion. Very basic.

So, what is working against this? I mean, in the case of marijuana we have an economic good that could be nearly free (it grows easily almost anywhere; it requires little complicated processing — even stoners can learn how to nurture and harvest the psychoactive agents in the plant) but has been raised in price because of legal actions by the federal government and all of the states. Still, despite the vast network of state agents directed against the plant and those who use it for pleasure, usage has remained fairly steady, and, by long trend, has grown. Why?

The cost rises and the usage rises? This defies economic law, you might say.

Mr. Payne writes as if it were obvious that this should be the case. And he has reason to: Experience. This has been the modern experience, and not just with marijuana.

But what of economic theory?

The standard answer is that marijuana is an inelastically demanded good. That is, it is so high on some people’s value scales (demand schedules, if you must) that increases in cost to obtain the good do not deter consumption. Indeed, marijuana may be that much-discussed rarity, a Giffen Good, an economic good that, with increases in price come increases in purchases.

Giffen goods, an anomaly in simple price theory, occur because of income effects. Limitations of income (or , more broadly, resources) mean that, if a highly valued good increases in price, lower valued goods must be forgone to maintain satisfaction from that higher-valued good.

The trouble with understanding such goods is psychological. Most of us do not attribute as much importance to the good in question as some few do. I, for instance, drink less alcohol as the price goes up. I like my whisky, anisette, port, and the occasional glass of wine. Sure. But not enough to continue to buy them in the same amounts when their prices rise. I prefer a cold Diet Coke™ or a cool glass of water. And when my income goes down, I swap the Coke for more water. A standard behavioral scenario.

And most people are like me. They cannot imagine buying more of a luxury like a psychoactive pick-me-up (or put-me-down) like alcohol or marijuana, and so they continue to give credence to the idea that prohibition of such goods makes sense.

But prohibition does not make sense if they are, in fact, Giffen goods. Not to everybody, but some.

And then we hit some interesting social factors not often discussed in economics: The divergence of markets by social stratification. Making a good illegal puts merchants and purchasers of the good outside the law, outside of “polite company,” so to speak. In the black market, trades are more dangerous, risk is everywhere, and representatives of law tend to be nowhere in sight.

This divorces illegal drug users from normal society, and puts them in a complete different social world. Expectations about behavior begin to change. Violence is just one aspect of this world. It is often not pretty.

And it traps some of those who enter it. They sometimes find it increasingly difficult to navigate normal society, find it harder to maintain an honest job, for instance.

But just the Giffen Good aspect has notorious side-effects. If you buy more drugs because the drugs have increased in price (because of the War on Drugs), then your income does not allow many other things. Like, perhaps, good food. Or toothpaste. Or a car. With fewer resources, you can be increasingly trapped from any possibility of upward mobility.

This scenario helps explain some of the horror we see regarding meth addiction. But, of course, to it we must add the sheer power of meth: It is the ultimate “Giffen Pleasure,” robbing other pleasures of their purchase in the human soul . . . and since life proceeds on little pleasures and little pains guiding our prudential action, those who partake of this drug can quickly ruin their lives. They don’t maintain the pleasure mechanisms that allow the rest of us to brush our teeth, comb our hair, bathe, and go to work. All the little pleasures have been burnt out.

Marijuana, on the other hand, is a much more mild psychoactive substance, though heavy users tend to reach a point after many years that mildly mimics the downward spiral often seen in meth addicts. Still, most users are moderate users.

And yet moderate users still use it, despite the possibility of getting caught. Indeed, people in all walks of life use it. What gives?

Here we have a market maintained, I think, by a core set of people who treat it as a Giffen Good. This market allows those who treat it more casually to continue to use it. (This works rather like Early Adopters who “subsidize” tech development: Their enthusiasm for new devices funds efforts to improve technology so that, as each tech device develops over time, and prices drop, others can afford it. Similarly, core marijuana users have maintained a market, against the official suppression, allowing casual users to access it for occasional purchase.)

Apparently, the only way to eradicate the market is to eradicate availability of the plant, as meth has been mostly eradicated in Oregon, according to the drug warriors most enthusiastic about Oregon’s full-scale war on the production of same (by stringent regulation of Sudafed, a key ingredient).

Not likely, for marijuana. It hasn’t happened yet, except for short, dry periods in some cities.

To summarize: The widespread use of marijuana by enthusiastic users and casual users alike challenges the most simplistic formulations of economic theory. But economics can still, I think, explain what is actually happening, and why simplistic formulations of supply and demand are inadequate to predict the outcomes of legal suppression of drug usage.

Further, it’s worth bringing up a point outside of economics: Widespread marijuana usage by both enthusiasts and casual users, in the face of both legal and illegal violence and risk, suggests that the right to self-medicate is a “right retained by the people.” The Ninth Amendment should surely apply here.

There is an old rule of Jeremy Bentham’s that would help de-inkblot America’s Constitutional interpretation on such matters. If you cannot, without enforcement, get at least 80 percent (Bentham may have said 90 percent) compliance on a rule, then the rule is wrong, not the people. Both utilitarianism and the American Constitutional tradition suggest that marijuana prohibition is a horrendous injustice put upon American society.

Filed under: Drug Policy, Economic Theory
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Henry Hazlitt"[T]he whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."
Henry Hazlitt, Economics in One Lesson






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