On the brink of a shadow drink industry

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Since the birth of the modern state, social reformers have tried to control gambling, prostitution and the use of alcohol, tobacco and other recreational drugs. They have argued that those who engage in these activities have not really made a free choice – they are addicted or coerced. Or, if they have made a choice, it is in ignorance of their own best interests. Their indulgence damages those who employ or love them, and everyone’s quality of life is reduced.

Many people who are not puritanical zealots, even many who themselves engage in these activities, have sympathy with such claims. The crusaders have consequently often been able to win wide support.

But legislation to control the supply of goods and services for which there is wide and established popular demand is always problematic. The paradigm case is the disastrous history of prohibition in the US. Restrictions of supply create profit opportunities, and in every generation there is a class of criminal entrepreneurs – people with business skills but little moral sense. The profits that result may corrupt the political and criminal justice systems, and reduce the fear of punishment to low levels. (For the avoidance of doubt, I am not talking here about press regulation or financial services.)

At the same time, the effect of criminalisation of everyday activities is to reduce general respect for law. This is the flip side of the “broken windows” theory that tolerance of petty crime helps to legitimise more serious offences. To stigmatise activities many people do not regard as petty crimes also helps legitimise more serious offences.

All the consequences are evident in the failure of the “war on drugs”. South American drug lords amass personal fortunes, control virtual states, and undermine the authority and effectiveness of legal states. At a level below these barons, we find many business people in US and European ghettos: people whose enterprise we would admire if applied in other fields of activity but who use these abilities to destroy the lives of those around them. The victims make up a large share of the prison population. Some are there for drug-related crimes; others have offended to enable them to afford the high prices caused by restrictions on supply and distribution.

The relevant lesson is not that legislation aimed at moral uplift is inappropriate. I am concerned only with the business economics. Restriction of business on moral grounds is not always unsuccessful but measures have to be applied with great care. The 1736 Gin Act, which attempted to put the spirit out of the economic reach of working people, failed. But the successor legislation, which encouraged licensed trade by respectable producers through judicious tax and regulation, was relatively effective.

And so it has been ever since: if moral legislation to control business is not carefully designed, and modest in aspiration, it can do more social harm than good. Effective regulation here seems most effectively achieved if the channels of distribution are controlled through regulated oligopoly – state-owned or franchised – and the political system is honest and robust. That is how Scandinavia and Canada seem to have been relatively successful in implementing laws to discourage sinful corruption.

All this is a preliminary to a discussion of the plans, currently controversial in the UK, to impose a minimum price per unit of alcohol sold. The admirable intention is to reduce alcoholism and discourage binge drinking by young people.

If this policy were implemented, it would raise the amount consumers pay for alcohol by about £1.5bn. That additional revenue would not go to government (as with a higher tax) but to the private sector. The big supermarkets and drinks producers would observe the law, and make increased profits. They would face competition for these profits from smaller producers, distributors, both legal and criminal, through lawful marketing and unlawful undercutting. The only certain outcome is that trade will be diverted from closely observed and regulated channels (does anyone remember the emergence of shadow banking?).

It is difficult to remain a realist in an ideological debate between social engineers and libertarians: and to pose questions about the design of policies to people who only reiterate statements of moral purpose. But we need to try.

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