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Drug Abuse, Drug Trafficking, & Organized Crime

President's Commission on Organized Crime, 1986


Consultant Paper: Part 1: Drug Policy and Organized Crime

Drug Policy and Organized Crime

By Professor Mark H. Moore. Submitted: January 3, 1986. Dr. Mark H. Moore is Daniel and Guggenheim Professor of Criminal Justice Policy and Management at the John F. Kennedy School of Government, Harvard University, Cambridge, Massachusetts. He is former Special Assistant to the Administrator of the Drug Enforcement Administration.

Introduction: Drug Policy, Law Enforcement and Organized Crime

Criminal laws prohibiting the production, distribution, and possession of narcotics and dangerous drugs are the basis of drug policy in the United States. These laws target the drugs that have no recognized legitimate medical uses: heroin, cocaine, marihuana, and hallucinogens. Enforcement efforts against these drugs can be uncompromising, for there are no legitimate uses or users to be protected.

Other drugs, however, pose similar threats to public health and welfare, but they do have recognized legitimate uses. These drugs include morphine, methadone, barbiturates, amphetamines, and tranquilizers. With respect to these drugs the aim of the legal regime and associated enforcement strategies is more complex. It is not simply to eliminate the drugs but to preserve a legitimate sector in which the benefits of these drugs may be enjoyed, while minimizing illicit use. Towards this end the laws license a limited number of people to produce, import, sell, distribute and use them. To prevent the drugs from leaking from and to illicit distributors and users, licensees have to secure their inventories, and deal only with other licensees. To make sure that the licensees meet these responsibilities, they must keep records and make them available to investigators for inspection. Failures to meet their responsibilities expose the licensees to both civil and criminal penalties. To make sure that no one can operate outside the boundaries of the legitimate system, the unlicensed production, distribution or use of these legitimate drugs is prohibited.

Drug Laws as a Comprehensive Drug Policy

It has become customary to think of the drug laws as operating principally on the "supply side" of illegal drug markets. For most practical purposes this is appropriate, for these laws are the principal policy instruments directed at the supply of illicit drugs. It is also generally true that the principal targets of enforcement are suppliers rather than users. However, these laws impose criminal liability on the illicit possession and use of drugs, as well as to illicit production and distribution. And indeed, each year more than 500,000 drug users are arrested for possession. Therefore, criminal enforcement is directed at the "demand side" of illicit drug use as well as the "supply side." To the extent that these laws attack both the supply and the demand for illicit drugs, they can be understood as a comprehensive drug policy, designed to distinguish legitimate and useful drug use from illicit use and to minimize illicit use in the society.

To produce this result, three different mechanisms are relied on. One is the moral force of the law itself. To the extent that individual citizens are guided in their decisions about drug use by the explicit instruction provided by the law, or to the extent that the existence of the law mobilizes widespread informal interventions by parents, friends and relatives, the existence of laws that define illicit use may succeed in reducing overall levels of illicit use without any public enforcement activities.

A second, more widely understood mechanism is general deterrence: the notion that citizens might be discouraged from illicitly selling or using drugs by the fear that they will be arrested and punished. This notion differs from the first in that it depends on citizens' fears of punishment to motivate compliance with the laws, rather than their desires to conform or seek virtue. The more severe the penalties, and the higher the probability of being caught, the more compliance will result.

A third mechanism is incapacitation: the notion that imprisonment may physically prevent drug dealers and users from continuing their activities. This concept differs from the second in that it operates only on those dealers and users who are caught, and only for as long as they remain under legal supervision. If enough drug dealers and drug users are locked up, then the problem of illicit drug dealing and drug use will disappear.

Limitations of Drug Laws as a Drug Abuse Policy

To describe these mechanisms is to reveal the limitations of the drug laws as a comprehensive drug abuse policy. The problem is not that they are directed only at the "supply side" of illegal drug abuse. Nor is it that they fail to produce reductions in the level of illicit drug use. The problem is that the drug laws are imperfectly effective. They leave behind a residual market, composed of drug dealers and users, who failed to get the message that they should abandon their drug activities. Moreover, while the levels of drug distribution and use that remain are undoubtedly lower than they would be in a world of legalized drugs, the character of the market on both the supply and the demand side are fundamentally altered and generally worsened as a result of their illegality.

On the demand side the users who are not dissuaded from using drugs discover that they confront high prices and low quality in the drugs they buy. In addition, they are exposed to social stigmatization and criminal prosecution. These circumstances produce disastrous results for their economic status, physical health, and social well-being. Of course, to the extent that these consequences are unpleasant to the users, they provide a continuing incentive for users to abandon their drug use. And, to the extent that the users do so, an important social objective is achieved. But to the extent they do not respond, their lives are made miserable with little corresponding social benefit. The society is left with drug users who are more dependent, dangerous and unhealthy than they would otherwise be.

On the supply side the residual capacity takes the form of an illicit industry. Some of that industry operates outside the boundaries of the United States, and therefore to some degree beyond the reach of its law. Another portion operates under the cover of predominantly legal drug production and distribution - within reach of the law, but a morally and legally ambiguous target. The vast majority of the illicit industry, however, consists of wholly illicit traffickers in the United States.

The Illicit Drug Industry: A Problem for Drug and Organized Crime Policy

The existence of this illicit industry creates two different kinds of problems. Viewed from the vantage point of drug abuse policy, the principal problem created by the illicit industry is that it continues to supply drugs to illicit markets. To the extent that this continues, old drug users nay continue their harmful activities, and new users may be recruited into dangerous patterns of drug use. Thus, to achieve the objectives of drug policy, the society must find ways to constrict the supply capacities of the illicit industry.

Viewed from the vantage point of those concerned with the control of organized crime, the existence of the illicit industry creates a different kind of problem. To a degree, the illicit drug industry engages in the sort of activities that make organized crime a specially important social problem. Not only do the illegal dealers frustrate the aims of drug policy by continuing to supply drugs, but they grow rich in the process and taunt the society with their financial success. Moreover, the industry seems to spawn violence. Sometimes the violence spills out into the general population. But even when the violence remains confined to participants in the industry, its sheer viciousness creates a general sense of lawlessness and brutality that is threatening to the community. The illicit dealers also seem to become heavily involved in corrupting government agencies. Such activities undermine community security, and the integrity of its basic institutions. Finally, the illicit drug industry may gives birth to unusually large and powerful criminal organizations, or nourish those that already exist. From the vantage point of organized crime policy, then, the drug laws create a major problem to be solved.

Drug Policy as a Portfolio of Policy Instruments

To deal with these side effects and residual problems, the drug laws must be complemented by other policy instruments. To deal with the limitations of drug laws in suppressing the demand for drugs, a comprehensive drug policy necessarily includes drug treatment and preventive education programs. Treatment programs must be provided to help users make the transition to non-use and to save lives that would otherwise be lost. Preventive education programs must be operated to give more detailed explanations to individuals of why illicit drug use is undesirable. Indeed, given the focus of drug enforcement on the supply side of the market and the obvious limitations of the drug laws in discouraging use among those who are already dependent, it is generally appropriate to think of drug treatment and education programs as the principal instruments focused on the "demand side" of the illicit drug markets.

To deal with the limitations of the laws in suppressing the supply of illicit drugs and preventing the appearance of organized criminal activity, traditional enforcement methods must be supplemented by some special policy instruments. Diplomacy and foreign aid must be joined to enforcement and regulation to reach the pieces of the illicit supply system that operate outside the United States. An effective regulatory enforcement system must be created to prevent the diversion of narcotics and dangerous drugs from legitimate to illicit markets in the United States. And perhaps some special enforcement strategies that are effective in constricting the capacity of the supply system to move drugs to illicit markets or in dispersing well organized drug traffickers must be designed and used.

The Objectives of the Paper

The purpose of this paper is not to design an effective overall drug policy. Nor is it to consider the wisdom of relying on criminal laws against drug distribution and use to the degree we do now. My opinion is that our current drug policy is a wise one, and that the balance of risks favors the continuation of criminal laws directed against the distribution and use of narcotics and dangerous drugs.

The aim of this paper is to take the existence of the current drug laws and policies as a starting point and to design a strategy to reduce supply consistent with the aims of our current drugs abuse policy. In designing such a policy, special attention will be given to the relationship between the strategy to reduce supply that is necessary to achieve the goals of our current drug abuse policy and organized crime policy.

As we have seen, there is some tension between these policies. Making drug distribution illegal establishes fertile soil from which existing organized crime groups might take sustenance or new groups might arise. Thus, the continuing prohibitions of drug distribution may exacerbate the organized crime problem. On the other hand, to the extent that organized crime groups are now active in producing or distributing drugs, and to the extent that our organized crime policy makes available resources and techniques that are effective in immobilizing such groups, organized crime policy may make an important contribution to drug policy.

In balancing these concerns the dominant emphasis will be given to designing a supply reduction strategy that can achieve the purpose of drug abuse policy. This perspective will be adopted not because it is obvious that an effective drug control policy is more important than an effective organized crime policy, but simply because, if it were true that it was more important to combat organized crime than to keep drugs from illicit users, the simple solution would be to legalize the drugs so that no illegal firms could arise. Since the society does not choose this option, it must be that we are willing to pay a price in terms of the objectives of organized crime policy to achieve the objectives of drug control policy. The only interesting questions, then, are how to minimize that price, and how best to deploy the special resources and capabilities or organized crime control policies to further the objectives of drug policy. That is what we will try to discover.

The Analytic Framework

As we have seen, the character of the illicit drug industry is important to the ultimate success of both drug abuse policy, and organized crime control policy. To define objectives, set reasonable expectations for success, and guide strategic choices in targeting supply reduction efforts, an analysis of the illicit drug industry is essential.

The Crucial Distinction Between the "Industry" and the "Firms"

In carrying out this analysis, it is important to distinguish the concept of the industry from the concept of individual firms within the industry. The industry includes everyone who is engaged in producing, importing, or distributing narcotics and dangerous drugs to illicit markets in the United States. A firm within that industry is nothing more than a collection of assets whose specific uses are determined by the authoritative decisions of an identifiable organizational unit.

Obviously, the firms that make up the industry could take a variety of forms. They could represent different production capacities, such as a boat, a person who knows the chemistry to produce psychoactive drugs, or $50,000 in cash. They could be involved in all aspects of the deal from financing through production, transportation, and distribution, or they could specialize in only one of these functions. For any given function the firm may be more or less dominant in more or less local geographic markets. They could consist of a single entrepreneur linked to others only through the fragile ties of economic interest, or they could include many people linked to one another by family or cultural ties. They could be relative newcomers or have a long history in the industry. They could enter the industry with hopes for a single, big score, or they could plan to become or remain a permanent fixture.

Often, the distinction between the industry and the firms that comprise it is blurred, and the industry is viewed as a single firm. This casual assumption is justified on one of two different grounds. One is that the observed performance of the illicit market is so impressive in terms of its operations and adaptability that it is hard to believe that it is not guided by a single intelligence. Nothing short of a single coherent enterprise could accomplish the enormously complicated tasks of collecting raw materials, processing then, and transporting the finished product through the mine fields created by enforcement agencies. Nor could anything other than an enterprise guided by a single intelligence adapt successfully to the frequent changes in supply reduction strategies.

The problem with this argument is that legitimate industries accomplish similar feats of production, distribution and adaptation all the time without a single intelligence guiding them. The reason legitimate industries are successful is that there are many guiding intelligences, but none predominant. The aggregate result of the individual choices made by individual economic actors may look organized in the sense that the industry gradually moves from places where enforcement has become heavy to areas where it is weaker, or it shifts from one drug to another depending on consumer demand. But this orderly response need not be the result of a wise choice by a single, powerful firm. It could be the natural result of the firms in the heavily enforced areas being wiped out, and the firms in the less heavily enforced areas growing to meet the demand. In short, the adaptations are made at the expense of individual firms, not under their control - nor, necessarily, to their advantage.

The second line of argument supporting the notion that the industry should be viewed as a single firm is somewhat more sophisticated. It is based on the hypothesis that some illicit firms will develop crucial specialized capabilities, and that these will give the firm important advantages in producing and distributing illegal drugs, or effective control over others who do. These special capabilities could be access to capital, connections with foreign sources of raw materials, knowledge of how to produce the drugs, a special tie to corrupt officials, or a general capacity for disciplined violence that could be brought to bear on anyone who produced or distributed drugs without their permission. This argument depends essentially on the idea that there are some natural economies of scale in the illicit industry, and that these will tend to produce a concentrated industry. This is a more powerful kind of argument than the first, but it is only an assertion. It needs to be examined with both logic and evidence.

The Analysis of Industrial Organization

The form of analysis that is appropriate is an analysis of industrial organization. An analysis of this kind rigorously maintains the distinction between the industry and the firms that comprise it. Indeed, the principal objective of an analysis of industrial organization is to understand the relationships among the structure of the industry, the conduct of the firms within the industry, and the long run performance of the industry.

The Definition of Industry Structure. The concept of industry "structure" explicitly captures the distinction between the industry and the firms that comprise it. It focuses attention on how the activities of the overall industry are divided among different organizational units called Firms. One key concern in examining structure is the degree of concentration in the industry. The fewer the firms, the more concentrated the industry. A second is the extent of horizontal and vertical integration. Integration refers to the proportion of activities essential to creating a product and delivering it to a market that are contained within a single firm. Vertical integration is measured by the extent to which a firm includes all the steps from extraction of raw materials to final sales to ordinary consumers. Horizontal integration is measured by the proportion of a given step in the production and distribution of a product that is controlled by a single firm.

The Definition of Industry Conduct. "Conduct" refers to the distinctive ways that the firms within the industry go about their business. Specific questions might focus on the production technologies now commonly utilized, major factors influencing costs within the industry, levels of investment in research and development, the rate at which new products are introduced, or the geographic organization of the industry's markets. Conduct might also be concerned with institutional relationships in the industry; e.g., the competitive strategies being pursued by firms within the industry, the relationships with governmental regulators, and even patters of collective bargaining and labor relations.

The Definition of Industry Performance. "Performance" focuses on the question of how successful the industry is over the long run in delivering a product at low cost, expanding the market, and adapting to changing circumstances. Performance is ultimately what an industry analyst is trying to understand. Indeed, the observations about structure and conduct are made principally to explain and predict performance. The more decentralized and competitive the industry, and the lower the costs of bringing new products or new production technologies on line, the more adaptable and dynamic the industry. The larger the economies of scale in operating, marketing, or bringing new products or production technologies on line, the more concentrated the industry is likely to be. The more concentrated the industry, the higher the prices and the slower the rate of innovation. Propositions such as these link observations of structure and conduct to explanations and predictions of performance.

Objectives in Attacking the Illicit Drug Industry

To a great extent this framework of analysis can be carried over and used in examining the character of the illicit drug industry. But some crucial differences are worth noting. By far the most important is that the implicit evaluative perspective reverses when we are analyzing illicit industries.

An Evaluative Perspective. In standard industry analyses one generally hopes for high performance from the industry. The more successful it is in delivering products at low prices, expanding its market to new areas, adapting to changing economic circumstances, and maintaining high rates of innovation, the better the result for the society.

In the case of the illicit drug industry, of course, the society's hopes run in the opposite direction. High performance from the illicit drug industry means that it adapts well to government efforts to eliminate it and continues to supply drugs at low cost to illicit markets. Over the long run, this means higher levels of illicit drug use. In analyzing the illicit drug market, then, what one hopes for is a failing industry: one that cannot overcome the hurdles set by the government in trying to get its products to market. These hopes are generally frustrated by the sheer inventiveness and adaptability of illicit entrepreneurs in pursuit of money. Nonetheless, one keeps hoping that this industry will stumble rather than flourish. Indeed, making it fail is an explicit purpose of public policy.

A second important difference is that in the analysis of the illegal drug industry, the structure and conduct of the industry have an elevated importance. As noted above, in traditional analyses of industrial organization, structure and conduct have importance primarily as factors that influence the performance of the industry. In the analysis of the illegal drug industry, they retain that importance: to the extent that structure and conduct enhance or hinder the industry's long-run performance in delivering drugs to illicit markets at low prices, they are a source of interest, and a possible target of enforcement actions.

What increases the importance of structure and conduct in the analysis of illegal drug markets, however, is that they are valued by the society independently of their impact on the performance of the industry. Crucial questions about the conduct of the firms within the illegal drug industry include the extent to which they rely on violence to maintain internal discipline or eliminate competition, and the extent to which they rely on corruption to ward off the threat of enforcement. To the extent that they do rely on violence and corruption as essential elements of their business, their conduct has importance to the society quite apart from how these practices affect their ability to supply drugs.

Similarly, the society seems to be deeply concerned about the structure of the illicit drug industry. Specifically, the society seems to regard the problem as worse if the industry is highly concentrated and composed of a few large, durable firms than if it were less concentrated and populated by smaller and more transient firms. No doubt, this view derives primarily from a dominant concern about the performance of the industry, and an assumption that an illicit industry, composed of a few large and durable firms, would be more effective over the long run in supplying drugs at low cost to consumers. It is important to keep in mind, however, that a highly concentrated industry might perform less well over the long run in delivering drugs to illicit markets than a more atomistic market. Economic theory tells us that prices would be higher in a concentrated market, and it is quite possible that innovativeness and adaptability to attacks would be less. The firms might represent more formidable enforcement targets, but the result of dismantling them might be larger and more durable than would be true in an atomistic market.

Even if this were true, however, it seems likely that the society would still regard an illicit industry, composed of a few large, durable firms, as worse than one composed of many small transient firms. The reason is that large, durable firms constitute a social problem independent of their ability to supply drugs. Large, durable criminal organizations can bring much more powerful pressures to bear on their employees, competitors, the government officials who are pledged to attack them, and even the communities in which they operate than could smaller or more transient firms. It is partly that the large, durable firms become very wealthy; partly that they can maintain truly frightening capacities for disciplined violence; but perhaps most fundamentally that they will be around for a long time and therefore able to reward cooperation and punish opposition that makes them so powerful.

Thus, the concepts of structure, conduct and performance help to clarify the society's objectives in dealing with the illicit drug industry. The concerns of drug abuse policy are captured principally by questions about the performance of the industry, since it is the long run performance of the industry that will decisively shape overall levels of drug abuse. The concerns of organized crime policy are captured principally by questions about conduct and structure. The concept of conduct captures the concern about levels of violence and corruption associated with an illegal industry. The concept of structure captures the special concerns that are raised for organized crime policy by the existence of very large, durable organizations, whose wealth, disciplined use of violence, and long memories make them especially powerful. A successful supply reduction strategy, then, would leave an illicit drug industry, which is high cost, ineffective in supplying drugs to illicit markets, not very adaptable, reluctant to rely on bribery and violence, and composed of small, transient firms.

Competition among Objectives. We are accustomed to thinking that any supply reduction strategy will move us towards improved performance on all of these objectives, and therefore there are no trade-offs between the objectives of drug abuse policy and organized crime control policy. We have already seen that there is a certain tension between the aims of these two different policies insofar as the criminal laws against drug distribution and use create the basic conditions under which an illicit industry night arise. But now it is possible to see a new tension as well, one that is not only between drug abuse policy and organized crime control objectives, but also between different objectives of organized crime control policy.

Ironically, a supply reduction strategy that increased the degree of concentration in the illicit industry might achieve some important objectives of a supply reduction strategy. Economic theory predicts, for example, that the actual supply of drugs will be less in a concentrated industry than in a more decentralized competitive industry. It is also likely that the violence would be less, or at least more disciplined and focused on those who were actually involved in the industry in a tightly organized, concentrated industry. Thus, a supply reduction strategy might succeed in reducing the overall performance of the industry and even changing its conduct to reliance on threats and bribery rather than overt violence, but do so only at the price of increasing the size, power, and durability of criminal organizations. Whether this would be preferred to a strategy that reduced the concentration in the industry, but enhanced its performance and shifted its conduct to more random patterns of violence depends on how the society values these competing objectives, and how much improved performance and violence it would have to accept as the price of reduced concentration. That would be a difficult choice.

The Definition of Improvements. At any rate, the directions in which improvement lie, are clear, and so are the objectives of a supply reduction strategy. The first and most important objective is to frustrate the performance of the illicit industry - to constrict its capacity to supply drugs to illicit markets. The second is to shape the conduct of the residual industry so that it is less violent and less corrupting. The third is to disperse the industry so that the firms that comprise it are small and transient rather than large and durable. How are one can go in achieving these objectives, and how sharp the trade-offs among them can only be answered by a close look at the factors that shape the structure, conduct and performance of the industry.

Major Factors Shaping the Industry

As in any industry performance is determined at least partly by engineering or mechanical factors: e.g., the physical requirements of production and distribution. To get drugs to illegal markets, firms must have access to raw materials, have the knowledge and the equipment required to transform the raw materials into finished products, be able to maintain and protect inventories, and be able to transport finished products to individual markets.

In addition, the performance of the industry will be shaped by economic factors: i.e., the perceptions of opportunities and risks. Those who make investments of the time and energy in producing or diverting raw materials, in learning the techniques and acquiring the equipment for producing illegal drugs, in storing and transporting the drugs, and so on, must have some assurance that they will make money from their investments. They must have some capital to give them the time and the capacity to arrange the deals that will ultimately produce satisfactory returns. They must also have a certain tolerance for risk - not only the risk that they might be imprisoned for their activities, but also that they might take economic losses as a result of successful enforcement actions against them, betrayals by their associates, or more common economic disasters, such as shipwrecks, plane crashes, spoiled production runs, or sudden changes in exchange rates. Unless there is a reasonable chance in their minds that they can make enough money from illicit drug deals to compensate them for their time and their risks, the deals will not be made.

A third factor influencing performance is the structure of criminal liability that surrounds the industry, for it is the laws and the way that they are enforced that determines many of the opportunities and risks facing illicit drug dealers. A simple way to think about how this factor operates is to think of the criminal laws and the specific methods of enforcement as a kind of tax confronting the illegal dealers. To maximize their return, they seek to avoid as much of the tax as possible. They do this by avoiding activities that are heavily taxed, by taking advantage of loopholes in the tax laws or weakness in enforcement, by concealing as much of their operation from the tax collectors as possible, or by corrupting the tax collectors. Such activities affect both the scale and the character of the illicit industry.

The Apparent Influence of Geography

Geography looks like a factor that plays an important role in determining the conduct and performance of the illicit industry. Indeed, much of our thinking about supply reduction strategies is guided by the notion that there are important "source countries" that become the targets of diplomatic and enforcement initiatives. Thus, for many years, Turkey and France were regarded as the principal sources of heroin, although they have now been replaced by Mexico and Southeast Asia. Similarly, Colombia is now considered the principal source of cocaine, and Jamaica a primary source of marijuana.

The reason that geography seems important is that different countries represent different clusters of conditions that give them a comparative advantage as a supplier of drugs to illicit markets in the United States. Sometimes a country becomes an important source country because of agricultural conditions that make it an especially attractive (perhaps even unique) place in which to produce raw materials. Thus, for a while, we imagine that opium poppies could be successfully grown in only a few countries in the world, and we now hope this is true of coca leaves. In short, a country may become an importance source of supply due to a physical advantage.

Other times it seems that a country has become a major source as the result of a long tradition of producing the relevant raw materials, or a large domestic industry that is based on them. In effect, the country has a unique institutional and economic advantage because it has a large infrastructure already invested in the cultivation of the opium, coca leaves, or marijuana.

Still other times, it seems that the country's advantage comes from week laws governing the legitimate or illicit drug industries, or weak governmental commitment and capacity for controlling the illicit drug industry. Just as Las Vegas can become the center of gambling simply by establishing a legal regime that tolerates it, Jamaica may become a principal source of marijuana by being particularly lax with respect to the suppression of illicit cultivation.

Thus, while geography looks like it plays an important independent role in determining the character of the illicit drug markets, this apparent influence actually derives from the more basic causes already noted: the physical relations governing production and distribution, the economic/ institutional relations that give economic actors reasonable assurances that investments in particular activities will be rewarded, and the legal regime that has an independent effect on the risks and opportunities confronting illicit dealers. Thus, geography may drop out of any close analysis of the factors shaping the performance of the illicit supply system, and be replaced by a separate consideration of how certain countries seem to represent unusually favorably combinations of the underlying causal factors, and which ones seem particularly important.

The Irrelevance of Physical Requirements

While it is tempting to search for the explanation of the structure, conduct and performance of the illicit industry in the physical mechanics of producing and distributing drugs, there is very little in these relationships that is unusual, or that could constrain or shape the performance of the industry. Many of the raw materials necessary to produce narcotics and dangerous drugs are widely available. This is true primarily because they have many legitimate uses, but also simply because they can be grown or artificially produced in many different locations. Of course, and occasional local shortage in basic raw materials may sometime appear. But, given the alternative sources of supply, it is hard to imagine that the shortage would last. Indeed, it is hard to imagine long run shortages in the availability of opium poppies, marijuana, coca leaves, or even chemicals used to produced synthetic opiates, hallucinogens, and other psychoactive drugs.

It is equally difficult to imagine that either the knowledge or the equipment necessary for manufacturing illicit drugs could be in long run short supply. The chemical structure of the illicit drugs are well known. Indeed, they are so well known that illicit labs are now experimenting with small manipulations of the chemical structure of existing drugs to determine if the newly created drugs will produce similar or superior psychoactive effects. These so-called "designer drugs" challenge the legal regime regulating drugs because they may be legal to produce and distribute until enough experience has accumulated to declare them a significant abuse threat.

The equipment required for the production of the drugs is also commonplace. Indeed, heroin "labs" in Mexico often consisted of little more than wash-tubs and rubber hoses. And the drugs can be made in many different quantities with few implications for the costs of production. So, there seems to be little in the technology of production that would have a decisive impact on the structure, conduct or performance of the industry.

The Impact of Illicitness on Industry Conduct

My strong conviction is that the dominant factor shaping the illicit drug industry is the simple fact that it is illicit. This fact has broad and significant implications for its structure, conduct and performance. The immediate consequences of illicitness register in the conduct of the illicit firms, but the changes in conduct have important implications for structure and performance.

The Risk of Arrest. The most obvious consequence of illicitness is that those who produce, import, distribute or use drugs illegally are exposed to the threat of arrest, prosecution and imprisonment. Moreover, in some countries, they are threatened by the seizure of any property or assets used in their illegal drug dealing - a threat whose significance may dwarf not only any fine they may receive, but also some jail terms.

The obvious effect of threatening illicit producers, distributors and users with jail is that the dealers who remain in the business will take steps to reduce their risks, or to compensate themselves for the risks of being is the business. The principal devices for reducing risks are to keep operations secret so that enforcement agencies cannot discover them, or to corrupt the agencies so that even if their operations are discovered, they are not punished. The principal devices used to keep their operations secret are to deal with a small number of people, to conceal the traces of their activities, and to screen and discipline their employees, associates and customers to make sure they are not undercover agents, and do not become police informants. The principal ways of corrupting enforcement agencies are to offer money to be allowed to continue to operate, and to inform on their competitors and associates so that the police can make arrests without harming their operations.

Such efforts can only be partially effective in eliminating the risk of punishment. To deal in large quantities of drugs and make money from the enterprise, one must inevitably deal with a large number of people, only some of whom are trusted and effectively disciplined. Thus, the risk of informants and undercover agents among one's employees, associates or customers is always present. Similarly, drug dealing always involves leaving traces of one's activities that cannot be entirely concealed: physical inventories of raw materials or drugs, records of financial transactions, even records of phone calls among the conspirators. These, too, are vulnerable to discovery by enforcement agencies. Also, there are so many agencies and agents involved in drug enforcement activities that one can never be sure whether all those who pose a threat have been corrupted. Since the risk can never be quite eliminated, the dealer's response is to demand additional compensation for the risks in trafficking drugs. He demands higher prices for drugs than he would if there was no risk of going to jail.

The Risk of Rip-Offs. A less obvious but by no means less important consequences of the illicit status of drug production, importation and distribution is that illegal dealers are confronted by threats from other criminals as well as by enforcement agencies. Indeed, associates, competitors and ordinary armed robbers probably create greater risks for illicit drug dealers than enforcement agencies. Partly this is because dealers are very tempting targets. They are likely to have large amounts of cash, or large quantities of drugs that can be converted to cash. Also, they are unlikely to turn to enforcement agencies to help protect their operations. They have to supply protection against armed attack or stealing. Those in the criminal milieu may know more than enforcement agencies about who is "holding" or currently doing business, and these other criminals may be less constrained by the niceties of due process than the enforcement agencies. Thus, other criminals may be more strongly motivated and better positioned to attack illegal drug dealers than the enforcement agencies, and therefore pose a graver threat to the illicit dealers.

The implications of this fact are that the dealers must make special provisions to protect themselves from this threat. To a degree, the same methods of secrecy and discipline may be as helpful against other crooks as against the police. But it seems likely that the threat from other crooks is more apt to be met by capacities for violence. In general, if an armed confrontation between the dealers and enforcement agencies occurs, the dealers know they will lose. They may win a local fire-fight, but there is no way they can compete over the long run with enforcement agencies in violent confrontations. Consequently, they rely most heavily on secrecy and corruption to deal with the threat of enforcement.

With other criminals, however, the balance of armed power is less clear. Thus, it is tempting to build capacities for violence to protect oneself and one's business from "take-off" artists, and to establish credible threats effective against betrayals by associates. This capacity for violence can also be used externally to drive out competitors. But the vulnerability to other criminals associated with illicitness provides the most immediate and compelling justification for developing a capacity for violence, as well as for secrecy and corruption. The existence of these capacities for violence among dealers and those who would steal from them produces the bulk of the violence within the illegal drug industry.

Thus, the conduct of the firms within the illicit industry is profoundly influenced by the fact of their illicitness. They are forced to maintain secrecy, and to prevent the infiltration of police agents. They must develop capacities to bribe, suborn, or mislead government agents. Also they must develop capacities for violence to enforce contracts with associates, protect their property from armed robbers, and to discipline employees. Finally, because the risks of arrest or rip-offs cannot ever wholly be eliminated, they must price their products not only to cover costs, but also to compensate themselves for the risk of arrest or financial loss they are taking by engaging in such a risky business. These effects on the conduct of firms have implications for structure and performance.

The Impact of Illicitness on Structure

The consequences of illicit status for the structure of the illicit industry are hard to estimate, for they will be determined by a balance of conflicting influences. On one hand, the desire to prevent the police and other criminals from learning about their operation will motivate illicit entrepreneurs to keep their small firms, transient, and neither vertically nor horizontally integrated.

The Virtues of Small Firms and Decentralization. Smallness has the virtues of involving only a small number of people and a small number of transactions. This implies both that the intrinsic vulnerability of the operations is less, and that the contributions of any special efforts to discipline or secure the operation will go further because there are fewer associates, employees or transactions over which to spread these efforts.

Transience has similar advantages to smallness. If the problems for illicit dealers is to avoid others knowing they are in business, they can accomplish this by getting into the business and out of it before anyone knows who they are. Indeed, from the perspective of avoiding detection, the best operation is one that is both small and transient. But that firm is not worth disrupting, also, for it could never amount to much in terms of its ability to supply drugs, its contribution to violence and corruption, or to become a powerful institution to the community.

Vertical and horizontal disintegration also have important advantages in avoiding detection. A vertically integrated firm would require some system of information-gathering and record-keeping to exploit the advantages of explicit coordination across the different phases of the operation. But these records would become an important source of evidence against the dealers. Similarly, almost by definition, vertically integrated firm would be large and involve many transactions, and each element of the firm would know what other elements were doing. Thus, a vertically integrated firm would present more possible points of penetration and would be much more vulnerable to any given penetration, than a firm organized as a set of largely separate cells that operated relatively autonomously.

Similarly, a horizontally integrated firm would also have to be large and would have to be in contact with all firms engaged in the activities at other stages of the production process. Thus, a horizontally integrated firm in the business of off-loading mother ships would come to know the principal importing firms that arranged for the mother ships to appear off the coast, and the principal firms engaged in storage and distribution. This would make such a firm vulnerable to betrayal by the others, compared with a firm that handled less of the overall off-loading business.

Thus, to escape detection, firms in the illicit drug industry would choose to be small, transient and disintegrated. This, in turn, would lead to a highly fragmented - even atomistic - structure in the industry.

The Virtues of Scale and Concentration. On the other hand, it is possible there are some economies of scale in the production and distribution of illicit drugs, or some opportunities for controlling competition that would lead to relatively large, durable firms, and a relatively high degree of concentration in the industry. Ironically, the principal potential for economies of scale do not seem to lie in the areas of production or marketing. Instead they lie in the development of capacities for corruption and violence that will give some firms special opportunities to operate safely and efficiently in the dangerous illicit markets.

The capacity for disciplined, irresistible violence may be a particularly important factor of production in illicit supply systems, and may be an area where there are natural economies of scale. As we have seen, a capacity for violence is terribly important in disciplining employees to keep then from becoming informants. It is also important in being able to enforce contracts with business associates and in protecting life and property from other criminals in a world where one cannot rely on the ordinary courts and police to perform this function. Moreover, once developed for these purposes, the capacity for violence can become important in eliminating competition, or forcing it to be small and transient rather than large and durable. For all these reasons, a firm had a substantial capacity for violence would have an obvious competitive advantage in supply drugs to illicit markets.

To argue that violent firms would have a competitive advantage is not quite the same as saying that the obvious value of a capacity for violence will tend to produce large, durable firms, and a concentrated structure in the industry. That argument rests on an additional assertion that there are economies of scale in the development of this special capacity for violence. This assertion, in turn, rests on the ideal that a useful capacity for violence consists not in the production of actual violence, but instead in a reputation for irresistible violence that can overwhelm (in force, viciousness, sustainability or all three) any degree of violence that another illegal entrepreneur can imagine mounting. This is important, for it is quite obvious that real violence can be produced quite easily and inexpensively. What is valuable violence, however, is violence that need not be used but will still intimidate and discourage others because it is there to be used and cannot be successfully resisted. To have this capacity, a firm must have available not only a large quantity of violence and demonstrate its willingness to use it, but also be a sufficiently permanent and relentless institution so that the possibility of an opponent challenging it and escaping without retaliation seems remote.

This capacity seems to have some natural monopolistic features. One can easily imagine how a single organization could gradually corner the market for irresistible violence and create a fairly impregnable local monopoly. One can less easily but still plausibly imagine a small number of firms with such capabilities co-existing in an uneasy truce, and ignoring a certain number of violations of their tacit understandings, as well as a small amount of minor competition from transient outsiders. What is hard to imagine as a stable equilibrium is a world in which there are large numbers of closely matched firms vying for the position of a recognized dominant capacity for violence. In that world the factor of production that has value - namely, a dominating capacity for violence that is sufficient to discipline employees, enforce contracts, and protect reliably against take-offs - is not available to any firm. Each firm is therefore vulnerable to all threats that a solid reputation for irresistible violence would guard against.

If the reputation for irresistible violence is valuable, it takes substantial investment to build the capabilities, and if it only has value when it is greater than any other competing firm's, the importance of this factor of production will tend to produce high degrees of concentration in the industry. This will lead to the development of a few large, durable firms in any local market. This is true at least in part because this reputation for violence can substitute for a small scale in preventing the detection of the operation. If employees, associates, competitors and customers are all afraid to give information about the operations of a firm to the police or other criminals, then it can operate at any given scale with less risk than another firm that is similar in all respects other than its capacity and reputation for violence.

The capacity for corrupting government officials may also be an important factor of production and distribution. This might also be an important factor of production and distribution that might also tend to create larger more durable firms and higher degrees of concentration than one might hypothesize, if one were thinking only of how the illicit firms might escape detection. The easiest way to think about the problem of corruption is to imagine that the various government officials and agencies, responsible for enforcing laws against illegal production and distribution, have a de facto power to grant a license to illegal entrepreneurs to operate legally - or at least with no treat from them. Obviously, the value of this license to the illicit dealers depends on the extent to which a given official or agency monopolizes the legal threat to them. If a given official or agency is the only official threat against an illicit dealer, the value of his protection will obviously be higher than if the official threat against an illicit dealer, the value of his protection will obviously be higher than if the official or agent is only one of many potential threats against the dealer.

Thus, the question of whether corruption will tend to concentrate in the industry depends crucially on the organization of the enforcement agencies. If the enforcement agencies were organized in a single agency, and if the hierarchical control within the agencies was very powerful, and if the illicit firm could corrupt that agency, it would be able to gain and hold a monopoly in the area principally by using the enforcement agency to help it eliminate competition, while keeping it safe. If, on the other hand, the enforcement agencies had fragmented jurisdictions, and quite imperfect control over their agents, then they might be more vulnerable to some degree of corruption, but the significance of the corruption would be much less. Essentially, the enforcement agency could not sell an exclusive right to operate safely. It could only sell little pieces of insurance against threats from specific agents or agencies. Even this would produce some higher degree of concentration in the industry than if corruption were not part of the operating strategies of the illicit firms, since it would establish some barriers to entry and protect the position of some firms. But it would by no means guarantee a monopoly.

The Net Result of Conflicting Pressures. Therefore, there are pressures that push the drug industry towards small firms and an atomistic structure, and others that are consistent with the development of local monopolies and relatively concentrated structures. My strong hunch is that the net result of this will be to produce an illicit industry that includes a heterogeneous distribution of firms. There will be a few firms that are in strong position to exploit the economies of scale that come from a reputation for trustworthiness, and for irresistible violence in the case of betrayal. Such firms may come to account for a relatively large fraction of the drugs reaching illicit markets, but they will be a small fraction of the total number of firms operating. This will be true partly because it is unlikely that these firms will become either horizontally or vertically integrated. The risks of long chains of command in the case of vertical integration, or a wide network of contacts in the case of horizontal integration are apt to be much greater than the potential benefits. It is also true because these firms will not be able to prevent (and will not find it worth preventing) occasional competition from transient or small operations which have their own sources of supply, and their own local markets. Therefore, there will be a great many firms of different sizes in the industry.

If one were thinking about analogies from legitimate industries, my hunch is that the best analogy might be something like the real estate industry, rather than the auto industry or even the fast-food industry. Many developers put together large, uncertain deals, rather than producing or distribution a product. Moreover, the deals are likely to involve several different partners, and the partnerships and roles may change from deal to deal. Those in the industry who have a reputation for trustworthiness, "deep-pockets," strong political connections, and effective lawyers are likely to account for a large fraction of the total dollar value of the deals made. But there will be a great many others in the industry who do smaller deals.

The Impact of Illicitness on Performance

Because illicitness affects conduct and structure, it also has an enormously importantly impact on industry performance. The crucial result is that drug prices are much higher than they otherwise would be. This is partly because the defensive strategies mounted by dealers against enforcement agencies and other criminals translate into higher operating costs per unit of drug delivered, and partly because dealers demand additional compensation for their risks. This is shown by the fact that the price of drugs in illicit markets is higher than the price of equivalent drugs in legal markets by factors of 20 or 30.

Almost as important is that the drugs are less conveniently available than they otherwise would be. Dealers have an incentive to conceal their activities rather than advertise then. Growth in the market tends to happen within intimate networks of friends, rather than through public advertising and widespread availability. In all likelihood, these are slower and less effective methods of market development than the same mechanisms joined with a legitimate distribution system.

We can combine the effect on price and the effect on availability in a single concept called the "effective price" of drugs in illicit markets. That would include not only the monetary cost, but also the amount of time a customer would have to spend looking for the drug, and the chance that he might fail to find the drug, or be cheated by an unscrupulous dealer. In these terms, illicitness results in much higher effective prices for illicit drugs than if they were legal. Note that this is probably true even if publicly supported enforcement activities were relatively ineffective. For, even if the threat from the enforcement agencies were removed, the threat from other criminals would remain, and that by itself would be enough by itself to increase dramatically the effective prices of illicit drugs. So illicitness has a profound impact on the performance of the industry.

The fact that the price of drugs is increased by the illicit status of the industry is evaluated in different ways from different vantage points. Viewed from the perspective of drug abuse policy, this is desireable because it will reduce overall levels of drug use in the population by discouraging new users from continuing their drug use, and motivating older users to seek treatment and abandon their use. Viewed from the perspective of organized crime policy, the increased prices mean a larger flow of revenues to illicit dealers and criminal organizations. This is damaging to the objectives of organized crime policy, for it creates the impression that crime pays, and provides the necessary financial means to enlarge illegal operations, or to consolidate a position vis-a-vis other criminal organizations or the enforcement agencies. Regardless of whether the economic proceeds are used by illegal dealers for consumption or investment, the higher revenues become a problem for organized crime policy.

It is also possible that over the long run, the higher revenues become a problem for drug abuse policy. This would be true, for example, if the conspicuous consumption of wealthy drug dealers attracted more people into the industry, or if the investments made by more disciplined dealers allowed them not only to dominate the supply system, but to increase its overall capacity to supply drugs. In each case, the revenues from the industry would be operating to increase the overall supply capacity of the system, just as excess profits in a legitimate industry would attract new investment into that industry.

It is important to keep in mind, however, that the reasons that prices are high in the drug industry is precisely because dealers are confronted by risks of violence and financial loss from both the government and other criminals. This fact remains true and continues to discourage many from entering the business. Indeed, the greater the risks, the greater the profits must be to attract any one into the business. That is the explicit purpose of making the drug business illegal and attacking it aggressively. As long as that threat remains substantial, the overall supply capacity of the industry will be much smaller than otherwise, even though people in the industry are making money. People do not flock to the industry, even with high prices and high revenues, because the risks are also high.

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