Thursday, June 3, 2010

The economics of grey and black markets: cigarettes in prison

In 1945, former P.o.W. R. A. Radford published a classic article on the use of cigarettes as money in prisoner of war camps. The piece demonstrated quite clearly that money could arise out of use of a commodity without any central authority imposing it. That money was a natural product of the human urge to “truck and barter” (in the common paraphrase of Adam Smith’s famous words).

With the introduction of cigarette bans in US prisons, apparently tinned fish became currency. But the bans did not eliminate the “gray” market in cigarettes as currency: they just created a black market in cigarettes, providing an excellent case study of the effects of prohibition in an allegedly highly controlled environment (prisons).

There is no substitute for reading the study, but I am going to pick out some juicy quotes from it anyway. First, we get the reality of fact-free public policy:
Despite this trend toward banning tobacco in correctional facilities, virtually no studies have examined the effect of this policy change on inmate culture and prison economies. In particular, no research has focused specifically on cigarette black markets that invariably emerge in jails and prisons where tobacco is prohibited.
Public policy so often exists in the land of intentions + resources => outcomes. Policies are judged by their intentions and money or regulatory effort spent. Who wants to be bothered by pesky effects? Particularly effects on non-voting felons?

Then we find out that Adam Smith’s urge to “truck and barter” is alive and well:
For many inmates, however, the formal prison economy does not provide enough opportunities to earn income and offers too few desirable goods and services from the commissary. Consequently, an informal economy develops that is premised on consuming prohibited or contraband items and “hustles” (Gleason, 1978) to earn extra resources to pay for contraband and legitimate commissary goods.
Moving on:
All of the facilities that allowed inmates to smoke prohibited them from trading cigarettes for other goods and from giving cigarettes to each other as gifts. However, cigarette exchanges among inmates were difficult to police, and sanctions for trading were rarely imposed, according to both inmates and officers at these six facilities. Furthermore, because U.S. currency was prohibited, cigarettes functioned as a local form of currency in these prisons and jails.
In other words, demand creating supply.
Other factors leading to a more developed black market were greater organization, communication, and black market skills among inmates. The structure of the cigarette black market as outlined here, with its kingpins, smugglers, middlemen, and dealers, is not too different from illegal street-level drug markets. In fact, inmates involved in the cigarette black markets were frequently individuals who had been incarcerated for drug crimes. These inmates were already skilled at financing and obtaining illegal substances; managing lieutenants, adversaries, and turf; and eluding social control agents. Consequently, banning an addictive substance in a setting filled with sophisticated inmates created an environment ripe for the development of a black market. As one inmate, who was serving a 90-year sentence in a maximum security prison for drug trafficking, lamented, “I would’ve never messed with coke on the street if I knew how much money I could’ve made selling cigarettes here in the joint.”
So, it is the demand and illegality which makes the skills sets valuable.
Interestingly, prison wardens and jail administrators often reported a decline in illegal drugs entering their facilities since banning cigarettes and attributed the decline to a greater demand for cigarettes among inmates. Inmates suggested that demand is, in fact, greater for tobacco than other drugs. For instance, several inmates claimed that kicking nicotine had been more difficult than quitting heroin, and others said that they would much prefer a cigarette to a line of cocaine. However, in addition to demand for tobacco, an equally significant factor dampening the drug economy was that tobacco was a more profitable substance to sell than other drugs. Whereas illicit drugs, such as marijuana, heroin, or cocaine, may yield greater profits per sale, the volume of tobacco sold and its high profit margin made it a more lucrative commodity to sell.
Turnover beats profit margin!
First, since smoking cessation aids, such as smoking cessation classes or nicotine replacement therapies, were virtually nonexistent in the facilities where bans were enforced, the inmates interviewed were compelled to quit cold turkey or contend with the vagaries of the black market. Most inmates interviewed chose to participate in the black market because their tobacco use rarely abated on entering a facility that banned cigarettes.
Policy judged by intentions, not consequences. This is where we came in …
Second, the majority of inmates were compelled to pay considerably higher prices to continue their cigarette habits. For instance, prior to a ban at a maximum security prison, one inmate said he spent about $5 per week on a can or about $15 per week on a carton. Following the ban, he smoked about three cigarettes per day at a cost of $60 to $70 per week. Consequently, the high cost of cigarettes prompted many inmates to undertake various hustles or to become low-level dealers because paying for only a few cigarettes could cost a third of an inmate’s monthly institutional pay. For instance, one 60-year-old inmate used his pension money to pay for black market cigarettes. He said he had been robbed six times and manhandled twice over cigarettes. Prior to the ban, he said he was never robbed or assaulted.
Illegality creates violence: since ownership is not recognized by the normal legal process, more primal processes determine ownership.
Third, just as the criminalization of cocaine and heroin gives rise to impure drugs and a scarcity of sterile drug paraphernalia, cigarettes sold on the black market are often more harmful than those sold legally and are combined with less healthy smoking practices.
Illegality decreases quality: since ownership is not recognized by the normal legal process, more primal processes operate.

So, an extremely revealing case study of the problems of prohibition. If you cannot make it work in the prison system …

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