Wednesday, March 5, 2014 | No comments

Prohibitionist Policies and Black Markets

By Riley Risto

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President Obama has recently decided to make it illegal to buy, sell, or trade ivory that is less than 100 years old.  International trade of “blood ivory” has been illegal since 1989. According to unnamed conservationists, illegal poaching and trafficking have exploded in recent years despite  scientific studies showing African elephant populations have generally stabilized across the 35 elephant range states in Africa.  So, in an attempt to deal a fatal blow to illegal trafficking of ivory, the president decided to take the 1989 restrictions a step further and deal with the contraband at home that feeds a black market internationally.  In recent years he has destroyed the supply of all seized ivory and artifacts and is now further restricting its interstate trade.

These sorts of special interest mandates carry wide popular support because they tap into emotion.  This is evidenced by the international public outcry over the routine killing of a genetically compromised giraffe at a zoo in Denmark a few weeks ago.  It’s the same with Arctic polar bears, tigers, pandas, gorillas, or blue whales.  People place higher emotional value on that which is exotic.

As evidence, the decades preceding the 20th century saw a steep decline in the number of American Bison, which were at one time plentiful, before cattle diseases and overhunting nearly caused their extinction.  Fortunately, private ranchers came together to protect the remaining population, estimated at less than 1,000 in 1889.  You could still buy a bison robe for $10 as late as 1887 though, which highlights the importance of information to the market system.  In the case of bison robes, the market was so inundated with supply, created in such a short period of time, that consumers had no idea just how rare the bison had become.  In fact, a prevailing thought was that the bison had moved north to Canada. It seems only the scarcity of an animal gives it value in the eyes of most, and if they’re unaware of the supply, the price doesn’t adjust accordingly.  Interestingly, one of the last few “pure” bison herds lives in Utah’s Henry Mountains.  Along with the Yellowstone herd, it may be the only non-genetically tainted herd remaining.

These examples offer some interesting teaching points regarding markets and value.  The first is that information is valuable.  Those operating on the edge of society who saw the diminishing herds of bison began rounding them up into private ranches, for conservation and personal profit.  These actions likely saved the American bison and were done, without government intervention, in response to market signals and information.  In fact, many previous attempts to regulate and restrict bison trade at the state and federal levels were flat out ignored.

The second point is that which is scarce or exotic or rare has not only economic value, but emotional or psychic value as well.  The classical maxim of supply and demand suggests that by restricting supply of a good, its demand, and consequent price, increases, if all else remains equal.  This has a multiplier effect, since higher prices lead to greater investment and effort expended in bringing more supply to the market, even when doing so is against the law.  This law of supply and demand still applies regardless of legal structures, except that banned goods are forced underground into a black market when restrictions are put in place.

Another case in point is the recent uptick in black market, cross-border gun sales in states surrounding Vermont.  Vermont has a strong tradition of hunting and gun ownership, despite its blue-state political leaning.  Access to guns is plentiful and attitudes about guns are more practical.  However, the surrounding states, being similarly hued politically, have tighter restrictions.  This has created a system of black market arbitrage which allows buyers in Vermont to profit from illegal sales in neighboring states or even Canada.  Whenever markets are forced underground, they find allies in other similarly restricted goods—hence the connection of guns with drugs and organized crime.  What is the reaction to this spontaneous order?  Predictably, it is to further control and restrict gun sales in Vermont, marginalizing the legal use of guns for self-defense, sport, or sustenance. This in turn creates, or further supports, the black market in surrounding states.  It’s a cycle that has been proven over and over and yet lawmakers continue to propose quasi-prohibitionist measures.

So the effect of scarcity and information on supply and demand is huge.  What saved the bison was private individuals with access to information making choices that benefitted them, economically or psychically.  This same model could be used with elephant herd preservation or any other number of special interest initiatives.

What is so often ignored in all of these efforts to inhibit the basic law of supply and demand is the fact that all marketable goods are eventually cleared, either on the black market or above the board.  Legal restrictions can place hazards or roadblocks in front of the sale of goods, but rarely does it stop them outright—it simply augments the risk-based price of delivering the good to the consumer.  Now I understand the moral argument that is made for wanting to restrict access to certain goods and services.  Blood diamonds, black rhino horns, fully automatic weapons, prostitution, and street drugs primarily serve the seedier elements of society.  However, we’ve become addicted to the idea that the only way to “starve the beast” is to starve everything that looks, acts, smells, or sounds like the beast.  History has taught repeatedly that black market traders behave much like water, moving their product through even the smallest cracks and crevices.  No amount of scotch tape regulation will stop that movement.  The greatest impact is usually felt by those who have a legitimate beneficial interest in using a restricted object, such as with medical marijuana.

We propose that free market devices such as reputation, price, privatization, and information set a natural balance to markets.  In Utah, we often see a black market spillover effect from all kinds of measures in other states that are materially more or less restrictive than ours.  Whether it’s prostitution in Nevada, marijuana in Colorado, polygamy in Arizona border towns, internet sale/use taxes, the sale of fireworks and higher octane beer in Wyoming—there is sure to be some residual effect upon Utah.

Up to this point the legislature has generally concluded that preserving a strong black market in Utah is a valid state interest.  The only other explanation (perhaps more likely) is that legislators have failed to see the unintended consequences of criminalizing goods and services which by themselves violate no one else’s life, liberty, and property, while in the process further restricting the free exercise of those rights by statute.  We wholly support measures that protect fundamental rights explicitly, while rejecting those that limit victimless free exercise.   Widespread disregard of and disrespect for legitimate laws is one of many unintended consequences of overregulation in Utah.

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About the Author

Riley Risto is Director of the Center for Free Enterprise. He holds a masters in business from Brigham Young University and works as a community banker. He is a passionate advocate of Austrian economics, outdoor enthusiast, husband and father of six children. He lives with his family in Midway, Utah.


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