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Published by: yourking on Dec 17, 2012
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honest and incorruptible. But to be famous for honesty might seem
an empty accomplishment when it was rewarded by dismissal" (Cof-
fey, 1975).

The Stifled Discovery Process

Not only are bureaucracies incapable of discovery, they also stifle
the discovery process of the market. Prohibition completely ends the
discovery process of the market with respect to the outlawed good.
Some direct effects of government intervention are well known.
Rent controls lead to housing shortages; minimum-wage laws cause
unemployment. These results can be viewed on supply-and-demand
diagrams, but these basic effects are not the only costs of govern-
ment intervention.

In addition, intervention also discourages the development of
new techniques, products, product characteristics, safety features,
and sources of supply. These are the very types of discoveries that,
given time, would make the call for intervention unnecessary, but
which cannot take place because of the intervention.
Although we cannot know the magnitude of these stifled oppor-
tunities, they are costs of the intervention. In the case of prohibition,
this cost is significant because the discovery process of the market is
not merely stifled but destroyed altogether for the good in question
and is severely curtailed or distorted for related goods.

The Wholly Superfluous Discovery Process

The elimination or control of a particular economic activity pro-
duces profit opportunities that previously did not exist. These profit
opportunities will likely disrupt the plans of bureaus and undercut
the pursuits of regulators and government policymakers. The sever-
ity of the intervention will determine the extent of these new (black-
market) profit opportunities. Therefore, the wholly superfluous dis-
covery process is particularly relevant to prohibition.
The profit opportunities created by prohibition will result in new
methods of production, transportation, inventory, distribution, and
marketing. The product, its quality, and attributes will experience
tremendous change moving from a competitive market environment
to one dominated by prohibition. These changes should of course be
attributed to intervention, not to the market. Cave and Reuter (1988)
found that entrepreneurs (smugglers) learn from experience; such

A Theory of Prohibition


increased knowledge can result in lower prices even during periods
of increased enforcement efforts.
Bureaucrats are also subject to this wholly superfluous discovery
process. Bureaucrats are normally unable legally to reap profit
opportunities as residual claimants of their bureaucracies. Profit
opportunities created by prohibitions, however, can be extended to
bureaucrats by black marketeers in return for protection or selective
enforcement. Bribery and corruption are unintended but nonethe-
less expected results of government intervention. Again, because
prohibition is an extreme form of government intervention, corrup-
tion due to prohibition will occur to a greater extent than corruption
associated with a price control or regulation.
In order to compare the severity of prohibition with other inter-
ventions, imagine a milk-price support established at $150 per gal-
lon. Even at current levels, the milk price support program entices
new suppliers of milk into the market. It encourages the develop-
ment of special dairy cows, the use of special hormones and chemi-
cals, and expensive feeding techniques. Even small amounts of
smuggling and corruption can be detected. At a support level of
$150 per gallon, one can imagine that missiles containing dried milk
might be shot into the United States, that artificial forms of milk
would be produced in basement chemistry laboratories, and that
economists would become dairy farmers.

In summary, prohibition is advocated on the basis of misconcep-
tions of the market's ability to solve social problems (although rent
seeking is typically required for prohibitions to be enacted, as shown
in chapter 2). Bureaucracies established by prohibition are inherently
inefficient and unable to discover the knowledge required to solve
social problems. Prohibition also suppresses the market's ability to
solve social problems, so that little or no progress is made while
prohibitions are in effect. And finally, prohibitions create profit
opportunities which add to the problems prohibition is intended to


I will apply this theory primarily to the prohibitions against drugs and the
prohibition of alcohol during the 1920s. These results are, however, equally
applicable to the prohibition of other goods, such as books, pornography,
prostitution, gambling, etc.

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