Context: Research for Cocaine: An Unauthorised Biography
Location: Via telephone
Date: May 25th, 2000
Interviewee: Dr Milton Friedman

Winner of the 1976 Nobel Prize, Milton Friedman was the most influential economist of the late 20th century, and possibly of the century itself.  In this brief interview he discuses how market movements affect the price of illicit drugs, and argues that cocaine is no different from any other commodity other than by dint of its illegality. He also airs a few controversial views about the War on Drugs: why it’s morally wrong, who benefits from it, and why it won’t work.

The interview was conducted from my home in London in May 2000. Friedman was based at the Chicago School of Economics until his death in November 2006

Download: Download Interview (PDF)

What is supply and demand?

You distinguish between the producers, who are sellers of product, and the consumers, who are the purchasers… If you think of the consumers of bread, there are various prices at which bread could be sold. For each price, there’s a quantity of bread that consumers will buy: if the price is very high, they will generally be able to buy very few loaves. If the price is very low, they will buy many loaves, so that you have what we call a Demand Curve, which is – on the vertical axis you have price, on the horizontal axis, quantity – and there is a curve running down, which is negatively sloped, which show the number of loaves of bread that would be demanded at each price. That’s the demand side.

On the other hand there are the bakers and so on who are baking the bread. The higher the price, the more they’ll be willing to provide, to stay alive. The lower the price, the less they’d be willing to make to survive. That gives you a supply curve, which is positively sloped, which shows that at low price there would be very little bread available for purchase. Where the two curves cross is the price at which the number of loaves demanded is exactly equal to the number of loaves supplied. And that is called the Market – or the Equilibrium – Price.

Is cocaine different from any other market product by dint of its illegality?

No different whatsoever. But what’s different is – in each case for each product, the sources of the demand and supply may be very different. For bread the sources of demand are consumers and the sources of supply are bakers and bakeries. For cocaine the sources of demand are consumers who want to use cocaine. Suppliers are the people who produce cocaine and manufacture it into drugs and who are willing to provide it to buyers. The fundamental principle is the same although the people who are involved and the incentives involved are very different. So it will behave like any other commodity on the market.

Now, the fact that it is illegal in this case will have various effects. It will lead some people who – if it were legal might be willing to buy it – to refrain from buying it because the actual price is not only what they have to pay for it but they really have to include the risk of being arrested so that the real price, as it were, is considerably higher than the nominal price. On the other hand there may well be people, youngsters in particular, who are induced by the fact that it is illegal in order to show their independence of the law and their parents. There will be some who will buy it when it’s illegal who would not buy it if it was legal. On the supply side, again, the cost of producing it is higher than the price that’s charged, because it has to include the chance of getting arrested and so on. On the other hand because it’s illegal, the people who run the racket – the drug sellers – do not register and don’t have to go through the business of being regulated by the government and in particular they never pay taxes. So it’s not entirely one sided. People are inclined to say that ‘Well if it were legal, the price would be a small fraction of what it is now because there would be so many more people who would supply it’ and that’s probably true in the end. But the difference between the legal and the illegal price is probably much less than people believe because the illegal sellers save costs in the form of taxes.

One of the key goals of the War on Drugs is to cause the street price of cocaine to rise. What does this achieve?

By making [cocaine] costly enough to sell the product, the street price will rise. If the chance of being arrested is very high, no-one will go into the business of selling cocaine unless he can get a very high price for it. Take a place like Saudi Arabia, where the penalty for being caught selling drugs it to have your arm cut off. I’m sure the price of cocaine is very high in Saudi Arabia – because very few people are willing to go into the business. Now the fact of the matter is that so far as the major countries, like the United States are concerned, they are not willing to go to that extreme.

But they are willing to go some way in that direction. If they did manage to cause the price of cocaine on the street to rise, how would the market react? Would it make it more appealing for the people down in South America to smuggle it?

No – no, not at all. Because the reason the price has gone up is because you’ve made it more costly.

The reason [cocaine] has become scarce is because more of it has been interdicted and taken over by the police. So in order to produce one gram on the street you have to try to bring in 5 grams. As it happens, interdiction is not very efficient. But let’s suppose that 4 out of every 5 grams coming in IS interdicted. Then in order to produce a gram to sell on the street, you have to produce 5 grams in Colombia.