It Takes Brains


How the Global Drug War Pushed Down Heroin Prices

By Chris Calton

23 March 2017

In the 1950s, Corsican gangsters such as Lucky Luciano created a mafia empire by smuggling morphine base from Turkey to Sicily, where it was refined into heroin, then shipped to France and finally to the United States. This was the infamous "French Connection" that supplied the bulk of the heroin supply that the United States received through the early 70s.

When Nixon took office, he pressured the Turkish government to outlaw poppy production, and the enforcement of these new laws largely shut down the Turkish opium trade in 1972. Nixon's "War on Drugs" looked like it was going to be a short one.

But where there is a market, there will always be a supply. The Mafia abandoned Turkey as their source for opium and found a new supply in the "Golden Crescent," referring primarily to Iran, Afghanistan, and Pakistan. Southeast Asia's "Golden Triangle" — being Laos, Thailand, and Burma — was another source for opiates that the Mafia was able to turn to, as well. The heroin trade quickly rebounded from the Turkish setback and even exceeded previous production levels.

As I detailed in a previous article, the US government tolerated the Asian heroin trade during the Vietnam War because they wanted to stay on good terms with their allies (primarily the Hmong) against the communists. After the Vietnam War was over, the DEA turned their attention on the East Asian drug trade, which was now the major world supplier of opiates, and the increased enforcement of drug laws yielded a reduction of Asian heroin by more than two-thirds.

With the drug trade pushed down in Asia, it quickly popped up in Mexico. This was a region that was easier for the United States to control, and enforcement efforts quickly and successfully shifted to Mexico. But a regime change in Afghanistan allowed the suppression of Mexican poppy to pop back up in the Golden Crescent with a force unseen in the early 70s. Opium production in the Middle East doubled between 1982 and 83.

No matter how successfully drug laws were enforced in one region, drug production always seemed to pop up elsewhere to fill the newly created void in the heroin market. In Drug War history lingo, this is called the "Push Down Pop Up Effect." In economics, this is little more than comparative advantage in action.

Comparative Advantage in the Drug Trade

The concept of comparative advantage has never, to my knowledge, been applied to the "Push Down Pop Up" phenomenon, but I am convinced that this economic concept better explains what we've seen in the global War on Drugs over the past several decades.

According to the Push Down Pop Up doctrine, when drug production is "pushed down" in one region through heavier enforcement, it will simply "pop up" somewhere else. This is empirically true when looking at the history of the Drug War. My issue with this doctrine is that it does not contain the full implication of these enforcement policies.

For one thing, the Push Down Pop Up theory cannot explain the trend of heroin prices over the past several decades. The United Nations started documenting global heroin prices in 1990, and since then, heroin prices have consistently dropped (and other quantitative data shows the same trend going back as far as the 1970s). Push Down Pop Up explains why heroin production continues despite enforcement efforts, but it gives no insight as to why prices actually fall.

The theory of comparative advantage, combined with an understanding of capital accumulation, answers both questions. Heroin production is dominated by a given region because that region is uniquely suited for it, obviously. This may mean that the lands are particularly fertile for poppy cultivation, or it might mean that the farmers have developed skills or tools particularly suited for this crop. In the case of Laos, for example, it came from technological innovations in heroin refinement that produced a purer substance. It can also mean, of course, that lighter enforcement of drug laws (or even the absence of such laws) lowers the relative cost of production through reduced risk of operating illegally. This last point is obviously the relevant variable in this analysis.

Every time enforcement increases in a specific region, this raises the cost of production in the target region and thus raises every other country's comparative advantage in heroin production. As a result, whatever region was previously the second most efficient producer of heroin now becomes the first most efficient producer. Turkish suppression meant East Asian advantage. East Asian suppression meant Mexican advantage. Mexican suppression meant Afghan advantage. And so the pattern continues.

The reason capital theory and the theory of comparative advantage actually explain the reduction in heroin prices is because each time the comparative advantage shifts, whichever new country takes the top spot of efficient heroin production makes capital investments in the heroin trade. Examples of these investments would be the construction of refinement facilities or the individual learning of agricultural practices for growing poppy. As drug law enforcement jumps from place to place, an increasing number of countries make these kinds of capital investments.

Once a country has made these capital investments, the long-term costs of heroin production decrease in absolute terms. This means that even once enforcement shifts to this newly dominant market, the cost of heroin production ends up being lower than it would have been had there never been the incentive to invest capital outlays to begin with. What we see in the Push Down Pop Up doctrine is that the dominant region of heroin production is constantly jumping around as the market adapts to the capricious enforcement practices of the various governments. But the overall cost of heroin production, globally speaking, is actually driven down by the ongoing incentive for more and more countries to make capital investments in heroin production. After all, even when a country is "pushed down" from its dominant position, it still continues to produce nominal levels of heroin.

In economic lingo, this means that global drug enforcement has made the heroin supply more elastic. When the Push Down Pop Up effect circles back around to a country that had previously enjoyed the dominant position, it is able to resume heroin production with at least some of its previous capital investments already in place, and the other countries are continuing nominal levels of production with the capital they invested during their own dominant production period.

The concept of comparative advantage also better explains the War on Drugs because it illustrates the unavoidable futility in any attempts to suppress drug production. In the Push Down Pop Up framework, it is at least theoretically plausible that world governments coordinate together and invest enough resources to push down poppy production in all relevant regions at the same time, leaving no region left for new production to pop up. Comparative advantage theory addresses this possibility with a simple answer: because the market still exists, if costs of production increase equally in all regions of production, the comparative advantage — and thus the dominant production — would simply remain in the same region that is currently dominant. Suppressing heroin production is therefore entirely futile when analyzed through this economic lens.

Instead of stymying the heroin trade, government efforts to enforce drug laws only helped to encouraged global capital investment in heroin production and thus helped created a more elastic heroin supply and continually falling drug prices. As these enforcement efforts continue, with an increasingly elastic supply curve, police resources will have to increase exponentially to even maintain the same poor results seen in the past as capital investment continues to increase regardless. Economically speaking, it is literally impossible to win the global War on Drugs.

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