Juliette Sellgren 

Science is the great antidote to the poison of enthusiasm and superstition. Hi, I'm Juliet Sellgren, and this is my podcast, the Great Antidote named for Adam Smith, brought to you by Liberty Fund. To learn more, visit www.AdamSmithWorks.org. Welcome back. Can you imagine not only underage drinking being illegal, but any age drinking being illegal? I sure can't. I can barely even understand underage drinking being illegal- conversation maybe for another time, but today on August 27th, 2024, not only is it my first day back at school, but I'm excited to welcome Nicholas Snow to the podcast to talk to us about prohibition and the economics of the whole thing. He studies a whole bunch, but he is the BKT Assistant Professor of Economics and the Tom and Anne Walsh, professor of philosophy, political science and economics at Wabash College. What is the most important thing that people my age or in my generation should know that we don't?

Nicholas Snow (1.19)

So this is a great question that since you warned me, you were going to ask it. I've thought a lot about, and there's so many angles I could go, but I think I'm going to go with in recent trends and I think this is happening on every side of the political spectrum. In a way we're getting more and more polarized and I think there's a tendency for us to really be charitable and acting in almost bad faith in our reading of our opponents. I think we need to get away from that and get back to reading works in good faith and charitably. So even if you don't like something you're reading, find the good in it, really work to understand what they are really trying to say and then that could lead to better debates and discussions. It's a good thing when we disagree with one another, but it stops being productive when we stop listening to each other.

There's a paper I wrote when I was in grad school with my advisor, Pete Boettke, and my colleague Dan Smith, it's called, Been There, done That: the Political Economy of Deja Vu. I'm quite proud of that paper because what we look at is the 20th century of economics as kind of a debate between [John Maynard] Keynes and [Friedrich] Hayek. We obviously come down on the Hayek side. However, the point of the article was really every time there is a financial crisis, we have and rehash the same old debate, and so while we're really hard on Keynes in the article, we're actually equally hard on our side because we're just really kind of talking past one another each time there's a debate. I think figuring out what are people actually saying to get on that level to have a productive conversation is what we need to do more of. We're seeing much more of things like just take downs of people like the Nancy McLean's book on James Buchanan, which argued really not true things. It's not like James Buchanan is beyond reproach or criticizable, and again, I don't say this as the other side is the only side that does this. I think we do it too, and I think we just need to get back to that kind of reading.

Juliette Sellgren (3.48)

I love that advice and I love that you gave examples, because I think a lot of the time it's not that advice isn't valid when you don't give an example, but it's a little hard to have the ideas flowing of how it applies to you and your behavior if you can't see it in the way someone else presents it to you. And so the Nancy McLean example is great because it's not about necessarily, oh, what they said was wrong either. Well, okay, it's not just what they said was wrong or I didn't like that. Why is it wrong? What's important? So the stuff Nancy McLean was saying was factually inaccurate listeners, there's an entire episode on this with Phil Magness, so go check that out. And that's an important distinction versus we read the same thing and we come to a different conclusion about what the normative implications are. And so you're having an entirely different conversation with your intellectual opponents and the dialogue is different depending on why you think what your opponent is saying is wrong and from that kind of charitable reading, because it might be that the sentiments that she has based on this incorrect evidence are valid, but if the evidence is incorrect, that's what you need to talk about, not coming from different sets of evidence to talk about something that seems like the same thing.

Nicholas Snow (5.17)

And it's a shame because I remember when that book was coming out, a lot of us were actually very excited even though we knew it was going to be critical, we were excited because it was a chance to have a conversation about the ideas of James Buchanan with somebody, but the way it ended up being, ended up being very unproductive, and I think that's a shame for all of us. I mean, the way I tell my students in class, I always, who here wants a better world for everyone? Almost every student almost every time raises it. You always get one joker, but everyone's on board with that, and I'm like, so all we're doing is disagreeing about the means and so we need to try to understand where each other are coming from much more to be able to have fruitful discussions.

Juliette Sellgren (6.04)

Yeah, it's having, I mean we talk about this a lot in philosophy or mathematics and these more metaphysical subjects where you need to know that the words you're using mean the same thing, can't really, I don't know, you can't even really have the right conversation or understand someone if you don't know what their definitions really are. And so actually what it is, it's like a very Smithian empathy/sympathy type of thing where you're stepping into their shoes to find something good, and I don't know, I think we could really do a lot more of that trying. 

Nicholas Snow (6.48)

You have to step into their shoes to figure out where are they coming from, what are they trying to say? There's no reason to think, okay, well, they differ from me, so therefore they must be wrong and evil. We might be wrong, but I think both sides probably want a better world. So yeah, I think when more I thought about, I was like, this is a good answer because it is something that I think is lacking currently, but it's really a shame.

Juliette Sellgren (7.16)

And it's great coming into, well, I guess we're in an election cycle or the beginning. I don't know what political pundits would say. We're not at the beginning in my mind. We're still at the beginning. We haven't voted yet, but I don't know, I guess depends on who you ask, but especially at the beginning of the semester, also being back at school after all of the protests and stuff last spring, and this is a good time to be thinking about this. So thank you for that and let's get into it. I want to start with some context, so you do a little bit of everything, but you seem to be knowledgeable on the history of economic thought, but also in order to study a market and other economic phenomena, phenomenon whatever, phenomena. ..

Most people know I hope, and I knew that there was a period of Prohibition in American history, but personally I didn't really know when it was, who the major players were, what the actual rules are. There was an amendment, but what did that look like? So can you set the scene for us? 

Nicholas Snow (8.36)

Yeah, in America can really be broken down into three errors. The first era is really from the colonial period up to probably 1830. This was an era where it was like it didn't exist. There was a few calls for temperance. It's important to note at this time, temperance meant just less, not none, right? So it was if you're going to do it, do it in moderation. No drunkenness. You did see some social issues associated with drinking around this time. Alcohol in my take is great, but it does have the potential to elicit social ills within society. I think that needs to be recognized. And so there were things, but however, at this stage it was so important, right? Drinking water was less clean. So listeners should go and look up what George Washington gave to his guests at some kind of farewell party he gave. I think most of us would die with the amount of alcohol that they consumed at this party, and so they drank a lot.

I like the way a historian Daniel puts it, Americans drank like fish, and so you don't see much, but you do see little private calls for like, Hey, this is an issue. We need to stop doing it. Then you get from 1830s to about the 1890s, you start to see a shift. Women in particular played a very strong role here. Men, the social ills were becoming more prominent and take their paycheck and they get it on Friday, and then they spend it all away by Sunday at the saloon leaving nothing for their wife and children. You start to see domestic abuse issues and stuff. So you start to see temperance still, not prohibition just calls for less. You do start to see a shift in more thinking that temperance means abstinence, but it's still all private sphere. You do have, mostly what you're getting is private protests, lots of things like sit-ins and things.

There was one, Carrie Nation is the famous example here who she's the exception. She was not physically violent with people, but she was violent. She's actually famous for, she would bring a hatchet into the saloons and just bust up all the liquor bottles and the saloon, then get arrested and then start over. So that's the second era. Then from 1890 to 1920, you see the further shift. This is marked by the emergence of the Anti-Saloon League, which shifts the game from private concerns to state. So they are now calling for a complete abstinence through a state prohibition.

By 1913 is when they had shifted. The original strategy was to go state by state, and in fact, county by county, they would do dry county runs and they would just vote to see can we get the counties to do it? It was often known as the Ohio idea because the Anti Saloon League starts in Oberlin College in 1893. I want to say forgive my date, and they implement this strategy. The city stayed wet, but basically they made the whole state go drive through that county strategy. But by 1913, they're shifting gears to a constitutional amendment, and it's kind of amazing to think they went really fast. It's only by 1919 that you see it go, which is a incredibly short amount of time. So they were a really aggressive lobbying group. In fact, the book at the time it was written in the 1930s was a political science dissertation labeled them pressure politics.

We could talk more about them, but they essentially pass it, and so then that sets it up where you have a constitutional amendment, which became the strategy, which as you mentioned became the 18th Amendment to the Constitution, which outlawed the transportation, manufacturing, and sale of intoxicating liquors. That has a fun story, too. As often one of the reasons why this is seen as why this went through was the liquor industry itself, the booze industry was incredibly fractured. Beer and wine actually supported it for the most part because they thought it would eliminate their competitor of hard liquor. And so by the time they realized that the Anti-Saloon league was coming for them as well, it was kind of too late. And so they never actually got the coalition that could have stopped it. And so they get it passed through, and it does end up being the define an intoxicating liquor through the Volstead Act, which is the amendment that gives enforcement to the 18th amendment. It's really all liquor, including beer and wine.

Juliette Sellgren (14.18)

Wow. It's wild to me because I was thinking about today and that there's no way Americans today would be for that, and I understand the drinking is different, but I didn't realize how different, because if there's an interest group, there must be a compelling reason why. So I understood that at the very least, there must have been a big enough problem that we get this sort of amendment, but I didn't realize that we actually drank like fish as a people before, not now, but before ever really. So it's kind of crazy. I guess it's a testament to the fact that in our system, through basically government capture, you can, and as a small but very powerful and very compelled interest group, you can change all the way up to the Constitution and everyone just has to live with it. Because I mean, how many Americans were pro this? I guess they went county by county. It must have been more than, I don't know.

Nicholas Snow (15.34)

It's interesting because one of the interesting facts about this is women were overwhelmingly supportive. Drinking was very segregated in terms of gender. Men and women did not drink in the same place. Men drank at the saloon. Women tended to drink at home, and so you have a separation there between how they're drinking. So they were supportive. And so prohibition actually comes before women's suffrage, and that was a huge issue because a lot of men did not want women to get the vote because they feared prohibition. The irony is it came without 'em, and I think a lot of that has to do with the lobbying things that I was talking about. So Bruce Yandle the Economist, has a public choice theory known as the Bootleggers and Baptist Theory of Regulation.

And I think that was a huge component here that was going on. So the Bootleggers and Baptists, it's actually the example Yandle uses is that a blue laws on Sunday, so you can't buy liquor on Sundays. Who's going to support that? Well, you're going to have the Baptists, which in this model can be in this case, is the religious group, but it doesn't have to be. It's anyone who's really supporting any public support for this. So you do see that the Anti-Saloon league would be an example of this. The women's Christian Temperance Union are another good example, but then also people like Henry Ford. Henry Ford actually prohibited drinking for his employees at his company, and that included, he found out you went home and had a drink in the evening, you'd get fired, so was another one. His support was nothing to do with religion.

He believed that a sober worker was going to be a more productive worker, which maybe there was something. There were free lunches were a big thing at this time, which is really, they would come and they would give you these really salty food for free so that you would then drink. So a lot of people did drink a large amount of drinking, had a large amount of drinking at lunchtime, it would come back. And so Fisher was like, we have to stop that. And so he supported it for efficiency purposes. And so you get groups like that, but that's not enough. You're going to have to this. So blue law Baptists are needed though, because the other one is the other group, the bootleggers are who is gaining financially from a regulation. And so in this case, we don't have bootleggers yet. In this case, there's not, although there were, Maine for example, went dry much earlier, and so you had a few states by this time who were fully dry, and bootleggers did exist there, but most places it was legal.

So who were the bootleggers? Well, some of the fun ones were things like Coca-Cola invested a large amount of lobbying to make sure this passed because they were a unique case. They were going to be, of course, a substitute. You can't drink, but then you can't drink a beer, have a Coke. But then also they were a unique important step and the amount of mixed drinks explodes during prohibition because the quality of the liquor drops. And so they're, yes, a substitute, but they're also a complement because people were diluting their bad tasting liquor with Coca-Cola and other things. And so then Welch's, grape juice, big supporters, anyone who gave kind of financial support. And so even if the vast majority of voters did indeed want prohibition, it did not want prohibition. I'm sorry, this still slips through, right? Because you get concentrated benefits and disperse costs.

Juliette Sellgren (19.41)

And I'm thinking even if voters did want it, something that strikes me as kind of a good way to learn the lesson of what economic consequences really are is this example, even if voters did want it, because there is a certain extent to, you have to get it passed. There's some sort of vote. And so it's not completely unchecked, which is obviously I'm a public choice fan, so I do think that the interest group lobbying thing is stronger than maybe others, but the voting is still there. But we don't always understand, and we don't always think when we're thinking about how we want our lifestyles to look or what values we want, or I don't want my husband to come home drunk just because all of those things can be true, and we want those things, doesn't mean that they don't need to check with reality. So I guess this maybe is still a public choice lesson, is that voters don't even have to bear the burden of knowing what the consequences of an action are going to be because it might sound nice, but the consequences were, well, liquor tasted worse for people who liked it. But also I'm this, I just kind of know from being around alcohol and knowing the products that were born out of prohibition, it got way larger in concentration, and I'm guessing way more dangerous to drink less. And so I don't actually know the numbers, but if more people died, I would not be surprised in the slightest. And so I guess in a way, it's almost a warning towards people who have this nice idea in their heads, whether voters or even just being wary as a voter of the powers that be in interest groups and lobbyists and whatever.

Nicholas Snow 

Coca-Cola

Juliette Sellgren 

Crazy.

Nicholas Snow (21.48)

I mean, there is a debate within public choice about the role that voters play. The Virginia School, people like James Buchanan versus George Stigler and the Chicago School where it's voters for democracy. For the Chicago branch would be voters get what they want and it's a good thing. They believe democracy is efficient. Regulations that occur occur because they're efficient. Buchanan and the Virginia School differ on that. They're like, no, the problem with democracy is voters don't get what they want. Bryan Caplan in his book, The Myth of the Rational Voter argues, no voters do get what they want, and that's why we get inefficiency. His theory is known as rational irrationality. I actually have a paper with Michael and Diana Thomas about this, about rational irrationality in the 21st Amendment, which is the repeal [of] prohibition. What we argue in that paper is, okay, as you said, these negative things happened. One of the things that drew me to alcohol prohibition is it's just such a clear case of this didn't work. I really don't know many modern day people who are going to argue alcohol prohibition was a rousing success. If anything, it was unmitigated disaster.

Juliette Sellgren 

There's a reason we don't talk about it anymore.

Nicholas Snow (23.17)

I mean, it's also they thought, oh, we got this for life. This was a constitutional amendment. There had never been a repealed amendment 13 years later, rational, but it's rational to do this. Why? Well, because there's benefits to holding irrational beliefs, right? So protectionism, economists would say, that's a bad thing, but yet you ask the average American and they're going to tell you, no, protectionism is good for America. Let's help our friends and neighbors in the steel industry. We need to help them. And so they're overwhelmingly supportive despite the experts, which maybe we're not right? As a hospital, I think we are, we know more on this subject. We are very skeptical of this, and yet Americans pass it. Well, why? Well, because as we said, concentrated benefits, dispersed costs. Yes, American voters pay for that belief, but only ever so slightly because it's so dispersed amongst us, so you don't have to worry about it.

I can vote. And so what Caplan argues is there's essentially a downward sloping demand curve for irrational beliefs. We will hold more irrational beliefs. The less those costs fall on us, the more they do, the less we're going to see. So we asked, well, okay, prohibition, this clearly didn't work. It was a disaster. Crime went up. Violence was ever, homicide rates exploded, right? All these things, negatives, negative, negative, the alcohol was indeed less safe. The quality was lower. All these things were not good. Also, there's this court in concept known as the Iron law of Prohibition, which states that the more enforcement you have, the greater the potency of the good you're going to have. And this works on both sides of the market. Consumers want more potency. You're going to go out a night on the town, you're not going to fill your hip flask with Natty light, right? It's not going to do the job.

Juliette Sellgren 

No, no.

Nicholas Snow (25.18)

Yeah. And so you're going to fill it with the hardest liquor you get, and we see that. We see alcohol. Whiskey skyrocketed while beer and wine went down, consumption, all consumption did fall. By the way, it's a supply reduction strategy. So that did happen. However, it rose steadily throughout prohibition. It fell from to 30% of the pre-prohibition level. So a 70% drop two by 1924 was back up to 70% of the pre-prohibition level despite increasing enforcement. So it's clearly not going well. And so we were thinking, okay, we have to apply Caplan's theory to this. What happens should we see this? Given that Caplan's theory, the more the cost following you, the more we should see people abandoning prohibition. And what we found was the Women's Christian Temperance Union, again, women were a big role in this, their leader, Ella Boole, and I believe she said this in 1929, she said, I represent the women of America, and we call them the repugnant voters because they're like, we don't care about the facts on this.

In a way, we're going to ignore the costs that are falling and just see what we can do. And so they never wavered on their belief in prohibition. However, a New York socialite named Pauline Sabin, she was initially a supporter of prohibition. She wasn't a drinker, but she was worried about her children. And so she became a big supporter of it once it happened. By 1929, she found the Women's Organization for National Prohibition Reform. Their numbers blew past the Women's Christian Temperance Union. You had lots of women switching sides in allegiance because we call them the marginally rational voters. They're not concerned about the outcomes. But once it started falling on them, like Pauline Sabin her again, she wanted to protect her children. It was way easier for children to get drinks after prohibition. You also had scandalous things at the time, like men and women drinking, as I said earlier, was segregated. Pre-prohibition. Post, they started getting integrated. That was scandalous to people in the 1920s, the youth drinking together, men and women. 

Juliette Sellgren 

Oh, no.

Nicholas Snow (27.55)

And so it was outrage to them. And so they not only changed sides, they actively campaigned. She was basically like to Ella Boole, well lady, here's one woman you don't represent. So she really working for the national organization for prohibition reform, and she was passing out pamphlets, and this one woman came and yelled at her and was like, you must hate children. Could you do this? Alcohol is evil. And just stormed and yelled at her and then stormed off. And then about an hour later, she came back and was like, I thought about what I just said, and it looked at your pamphlet and I'm sorry, I think you might be right. And so she joined that organization. And so you did start to see in some ways this voting not falling on you. Problem is a very real thing, but there are ways to overcome it so we don't have to be completely pessimistic on how to do these things. Again, this was in a way it passed. It got passed in a way. We shouldn't have expected it to be repealed, and yet it did because it didn't go well. Something to say about our system, I guess.

Juliette Sellgren (29.07)

Yeah, there's some hope there. I like it. So we've kind of danced around this and I've mentioned some of it and you've mentioned some of it, but especially I'm getting into teaching my second semester of Intro Micro and it’s awesome. Yeah, really, really cool opportunity. But I'm trying to think, this is a great example. How do you kind of explain, especially to a student, someone kind of relatively new to economics, what was right? So you have the supply restriction, which does lower absolute levels, but how is demand fluctuating and what are the different constraints on the market and how people are changing their behavior throughout this time period? Because you mentioned it wasn't consistent and I'm kind of thinking black markets, that sort of thing also.

Nicholas Snow (30.01)

Well, I think that's the key. So to me, the best way to understand this is to turn to the Austrian School of Economics, in particular, their focus on the role of entrepreneurship. So you can follow the work of Israel Kirzner here. The idea of prohibition, it's a supply reduction strategy, so it works very similar to the analysis you'd see of a one-on-one textbook class in say, taxes. The tax is applied, that shifts the quantity that's being sold on the market and raising the price, but it creates these inefficiencies that come with it. The same analysis is basically happening prohibition, one way I've heard it is it's basically the ultimate tax, right?

It is not being taxed, but you can't do it. And so it's just the supply curve up into the left. How much are you going to see? Reduction in consumption will depend on elasticity. Is that good? Are consumers flexible? How much less we know they're going to buy? The law of demand states that the price goes up, you're going to buy less. How much less will be determined by elasticity. If alcohol is as addictive as people say, then it should be pretty inelastic in which you wouldn't see that big of a drop. It's not going to be as much as say, heroin, which is extremely addictive, but you're still going to see a similar analysis. And so you're pushing things out, the competitive nature of the market. But what Kirzner actually correctly argues is that's not what it does. What it does is it shifts the discovery process, right?

Entrepreneurs, the role that they play in a market through the profit and loss system is one of figuring out, well, what are we missing? What haven't we discovered that people want? So a way in supply and demand would be to think, okay, the equilibrium price and quantity we're seeing right now is wrong because we're missing some kind of information that no one else sees. Once the entrepreneur comes in, introduces their concept, people shift away from it. And so with that, entrepreneurs in this case don't get eliminated by this strategy. They're altered by the strategy. So the first thing they can think is, who's going to be selling this? I like to frame it in terms of thinking about it, like who's going to be left in this market? What is the comparative advantage you need to succeed in this market? Is it someone like Mr. Rogers for Mr. Rogers neighborhood or Al Capone, who's going to have the skill necessary to still make a profit in a market where you're actively prevented from selling the good by the state?

And because of that, you can't turn to the legal system so you're more vulnerable to exploitation and crime, all sorts of those types of problems. Well, you need someone who's going to be good at protecting themselves. You're going to need someone who's good at evading the police, maybe somebody who's good at bribing the police. All those things are now going to be necessary. And so Mr. Rogers, it's not really a lovely day for him anymore. He's going to exit. So my dissertation was actually on rum running in the 1920s, which is off the coast of New York, was an area known as Rum Row when it started. It was basically it was legal to sell liquor on the international waters. It was just illegal to bring it into the country. Don't really, he wasn't a liquor salesman, but he noticed, Hey, if I can have it shipped to the Caribbean, Nassau ended up being the main hub there.

He would then go to Nassau, pick it up in his schooner, which were often called motherships. They would then go and anchor off three miles off the coast. And then even in the earliest days, people would come out in rowboats and be like, they acted as floating liquor stores. So you get an entrepreneur figuring out, here's a new way, and this is just one example of how they did to get the stuff that we're not allowed to get. Obviously the Coast Guard knew about this. They were well aware of it. They were trying to prevent it. And so that era didn't last very long. And so you start seeing a shift. Entrepreneurs shifted from it acting as here's where consumers get the goods to more of a wholesaling. So you'd have syndicate who had purchased the beer or not beer, wine. It's whiskey. Again, despite the name Rum Row actually comes because it was journalists using a derogatory term.

Americans at the time were not a fan of rum, and so it was meant to be derogatory, but they're selling whiskey and the syndicates would now have to go get the liquor themselves. And so you started seeing a new entrepreneurial element come in, which is where a guide is known as the rum runners themselves. These were guys who would get in speedboats and burst out onto the ship, come back in one number. It would cost you something like $2,000 and 19 $20 to buy one of these speedboats, but you would make that money back in two trips. So you're more wholesalers at minimum. And so they're rushing them in. You're seeing that. Then the Coast Guard in 1924, they catch on as cat and mouse game. They do a blockade that essentially almost ends Rum Row. I say almost. It did kind of continue. You just now had to have one of two options.

You had to be a big enough firm that you could either have the necessary technology like radios, which were rare at the time, such that you could radio to shore, where you'd wait. By the way, they move the international water from three to 12 miles off that help the Coast Guard. So ships would actually have to wait a hundred miles off the coast radio in and be like, do we have a hole in the blockade? And wait, play a waiting game. What the better firms did was just brought it right into New York Harbor. The most famous example of this was Charlie Lucky Luciano, who was the leader of the mob by the 1950s, and Meyer Lansky, who's known as the accountant for the mob, they had a syndicate that the biggest syndicate out of New York, they would just bring it right into New York Harbor. They were able to do that because they had an extensive bribing network.

And so you start seeing this, but entrepreneurship actually shifted at that point. Ron Row was basically a minor's deal because all the actual importing of liquor moved from that area to Detroit. Detroit had the Detroit River. One prohibition agent once said the Lord could have made a more perfect river for rum running, but the Lord certainly didn't. It was less than a mile wide. Canada was actually quite devious to us. They had prohibition before we did. They went dry first, but it wasn't going great. So they kind of were like, well, what if we allow production for export? And so Ontario actually did that and people would then, Americans are free to come over. They'd be like, where are you going? And they'd be like, Cuba. And then they'd be back in an hour buying more. So you'd see lots of different, entrepreneurship was kind of everywhere, but it alters. How do you make a profit? Well, you have to have a different skillset now. So some of the are fun ones come from Detroit of stories about how to smuggle. My two favorite are probably the first guy was he actually just built a pipe under the river from the Canadian side to the American side, and he would just pump it from the Canadian side into the house and the American side. He got caught because the pipe broke and the plumber ratted him out.

And then my other favorite, I just call him the egg guy. They were really perplexed by this guy. He would make multiple trips every day where he would just bring in a bunch of Canadian eggs. Well, it turned out one of the times he was driving back, he hit a bump, one of the crates of eggs went flying, and instead of yolk going everywhere, whiskey flowed everywhere. He was just filling the eggs with whiskey. So you see lots of pretty ingenious ways of evading, but in some ways this isn't good, as Kirzner would say. That kind of thing is kind of an example of the superfluous discovery process and that you're kind of having to use resources to figure out ways around this impediment. It's like a form of rent seeking in a way where you're using resources in a non-productive way. And that's problematic because the opportunity cost would've been to use it in a productive way. And so you don't see the end of it. You just see how to make that profit is going to change.

Juliette Sellgren (39.53)

This is a perfect segue kind of, but even lead in maybe because it is superfluous is the perfect word, actual welfare, however you define it, however you measure it, if you say you care about social welfare, the idea of having markets do things that otherwise would be completely unnecessary. So instead you could have innovations in medicine or we don't even know what, but instead, we're spending our money avoiding the laws that have created the need for the thing in the first place. And that is just really silly to me because we have so many examples and we would have so much more innovation in more positive, even though, I mean positive say, and I'm not saying we can decide or measure it, but we know for certain that avoiding prohibition when you could innovate elsewhere is probably a waste of time. And so what I want to know is how you use this case to think about people who either want to prohibit other sorts of things today or get somewhere close to that by sugar. And the big gulp New York thing is probably what comes to mind for me, but that you kind of apply everything that we can learn from prohibition to these other forms, these kind of deceptively nice sounding policy ideas that could actually be really not only ineffective, but kind of a waste and not great.

Nicholas Snow (41.34)

Yeah, I think the answer is more economics in a way. I mean, one way to think about it, I always, always struck by a Hayek quote. I don't know if I'm saying this correctly, so paraphrasing, but he always says economics. Our job is kind of to put parameters on people's utopias. You're a Smith fan. So it's kind of like we're taking lessons to the men of system. Those people who are just so self-righteous in their plan for society that they just treat everybody like, we're chess pieces, and I'm not a pawn. I don't think you're a pawn, right? We're not necessarily going to go about it like that. And so prohibition to me is a perfect example of that where it's this. It might even be a nice idea. I always tell the students, economics is a positive science. That means we study what is not what should be.

So my job in promoting this issue isn't like to take my role as a classical liberal or whatever and be like, well, I am against drinking prohibitions because I believe in freedom. I do, but my role as an economist instead is to say, okay, no, let's take their end as a given. So I always start it with makes them laugh. I'm like, it's like South Park. It's Mr. Mackey Alcohol's bad. We don't start with their end goal. If alcohol is bad, is prohibition a good means of achieving this end? You can ask the same thing for any of these. Your examples with the sugar, is this really the good strategy? And so I think we really just need to teach [Frederic] Bastiat more. This is really what is seen and what is unseen. Good economists look at both.

Prohibitionists kind of fail to do that. They just kind of assume we want the state to do this, and we're just going to assume it can. But our job as economists to be, whoa, that's a toughie. Now, in fairness, economists of the day, were getting this wrong. I think that's important to note. It is. It was one of the cool finds I found because you read economists today, a very few are going to be prohibition. I always joke with my students, I'm like, who is against the war on drugs? Famous drug users like Milton Friedman and Gary Becker. I'm sorry, did I say drug user? I meant Nobel Prize winner.

Of course not drug dealer/users. They're very smart men who probably would've never touched this stuff, but they were against it. They're against it of economic analysis. There's a great quote from Gordon Tullock and Richard McKenzie that's like, if only they had bothered to ask economists back then we would've told you not to undergo this program of moral evaluation. It's a great quote because it gets at the heart of what economists today think. It's a bad quote in the sense that they did ask economists back then. The main guy leading the charge was actually Irving Fisher, famous monetary economist. He was weird to say the least. He was a man who was not good at predictions. He famously said, a week before the 1929 crash that stock prices were at a permanent high. He lost a lot of money, but he also wrote three books on alcohol prohibition, and he proclaimed that the alcohol prohibition was going to usher in a new error of productivity and basically awesomeness.

He thought alcohol was evil and bad and that nobody should drink despite this. Even my favorite quote from him is just because I believe so enthusiastically and enlarging the personal liberty of mankind to enjoy the full possession of his powers that I favor prohibition. So he was kind of arguing for it. However, in the American Economic Association meetings, he was asked to put together a panel on alcohol prohibition, and he claimed that he could find zero economists who were willing to go against prohibition. And so you didn't see too many economists go, certainly nobody really arguing against prohibition and most just not thinking it's in their wheelhouse. But today is certainly, I think economics is really the tool that puts parameters on that utopia.

Juliette Sellgren (46.33)

And I guess briefly before we wrap up, how did we get from that? Where I'm listening to you talk about him and I'm like, why did anyone ever listen to him? Because it just doesn't…

Nicholas Snow 

I mean, his monetary economics is fine, I guess.

Juliette Sellgren 

Yeah, but it seems like it's not that you can't have two specialties, but some of the stock prices at an all time forever high is interesting. I mean, okay, hindsight, 20/20.

Nicholas Snow (47.04)

I have a paper on Fisher and we argue often. He had said, this is like a deviation from his economics. We argued that that's not true. It was a lot of really bad statistics in those books. However, we argue that Fisher basically his economics, he sounds like a modern new paternalist. The reasonings he's given for why we need it are basically things like people aren't rational enough. You don't have complete information. People have limited cognitive abilities, and they lacked willpower. These were all very similar things. Of course, the difference between him and the new paternalism is he doesn't stop with minor altercations to a choice architecture. He's just like an old school prohibitionist.

Juliette Sellgren (47.52)

Yeah. So I mean, obviously you can kind of trace back new paternalism and I call them to that. But then there's also this other strain that is here, us talking about this right now, how did we get to a point where, I mean, other than maybe living through the consequences of it, the actual economic intellectual lineage decides that this is not a good thing.

Nicholas Snow 

I'm not sure what you're asking.

Juliette Sellgren 

So how did we, I guess, economics as a discipline go from having not that many people interested or studying prohibition and having Irving Fisher saying these sorts of things. And then we end up here where economists kind of generally agree that that is not good. Even if you're a nudger, you don't think prohibition is the way because we've seen it fail.

Nicholas Snow (48.57)

Yeah. I think the big reason on this, Fisher, for example, was seen as a weirdo at the time for this. He was very well respected for his monetary economics, although not fully. Some of the things he had one proposal he had, I think that dealt with The dollar was not totally well received, but he also was this saving reformer. He had weird ones. He wanted to change the calendar. I don't even know what that was fully about, but prohibition, he wrote a whole book on living well, for example, that was a bestseller, and people thought he was weird because of that. It really kind of hurt his reputation. Even at the time, if you go read for example, the famous economic history of thought book by Joseph Schumpeter, he really kind of rails into Fisher for some of this while still maintaining some level of respect for him.

So he was kind of seen as a weird guy for even looking at this. So I think it was just not seen in the purview. So I think what ended up happening in a history of thought approach is probably the Chicago school did it, and arguably lucrative is a lot of the guys read Human Action and the way Human Action is written. It's like any human decision making process, which made a lot of economists jump up and say, Hey, we can jump out of our usual comfort zone here and start looking at things. And so someone like Gary Becker came along and was like, let's stretch where we can apply rational choice theory to these different realms. And he's a big reason for this. Some of the things he did was just on discrimination, the economics of the family, but the relevant one here is the economics of crime.

At the time in the 1960s, anyone looking at crime, it was like, well, what's the problem here? Well, it's there either victims of the social system or they're mentally ill, is the big explanation. Becker had the unique idea of being like, well, what if they're rational? Can we use rationality to describe this? And so I think that kind of exercise led people to realize economics can be applied in this broader sense. And once we started applying it, well, rational choice theory kind of predicts the things modern economists think, which is that this isn't a good idea.

Juliette Sellgren 

That's so interesting. Thank you so much for sharing all your knowledge and wisdom on this with us. I have one last question for you, and that is, what is one thing you believed at one time in your life that you later changed your position on and why?

Nicholas Snow (51.54)

So I wanted to kind of connect this to the first question you asked about what young people, because I think it goes back to I was very against the Coase theorem when I was in undergrad. I had a professor who didn't like it. He basically argued that the Coase theorem makes you assume, okay, the best thing to do is to promote GDP. And so it promote this problematic angle. And so prior to that, going to grad school, I was kind of anti GDP. I remember going to my first law econ class in grad school and getting really excited, and I go, I'm going to rip the Coase theorem up. And then I actually learned it and I was like, oh, this is what this says. No, this is probably right. And so it completely changed my view and why I wanted to connect those two things. The interest is I don't think I read it well, partly I was in undergrad who didn't know what I was doing yet. But also partly I was probably sloppy in my reading. And so I needed a more clear, clever reading. And now I'm really glad I did write that, did do that well and changed my mind. So it makes me very conscious about when I read things, even if I start with the assumption, I don't think I'm going to like this. I always try to find something.

Juliette Sellgren (53.15)

That's great. Could you clarify a little bit what you thought the coast theorem meant? Because as you were saying that at first I was trying to reevaluate whether I knew which theorem you were talking about. 

Nicholas Snow (53.30)

So the Coase theorem is a very difficult concept in general. It also is confusing because of the theorem itself. So the theorem is actually coined by Stigler, not Coase himself. He basically presented his paper at the University of Chicago. He came, presented the paper prior. They all were like, this is dumb, and we're ready to tear it a new one. But after he presented it, the joke is everybody changed their mind except Milton Friedman who changed their own mind because he never lost a debate. So they all left it being like, this is correct. And so Stigler, was, I guess it's the Coase theorem, but the theorem is actually a theoretical tool that Coase is using. It's just a simplifying assumption. He's like, okay, imagine a world with no transaction costs.

Do you need the judges to make the right call in terms of economic efficiency? And his answer is no, because if say I'm doing something like I'm dumping my trash into your yard, and let's say that I value doing this really high. I'm like, I'm lazy. I would do this for, I would pay $500 a month to dump my trash in your yard. And you hate it naturally, but you're like, yeah, but I barely use my yard. I would only pay a hundred dollars to make this go away. Well, clearly I value it more if a judge says, I need to stop without the transaction costs. We can stop and say, whoa, yeah, let's negotiate. How do we get to a good point where we get the efficient outcome? Well, it's really easy. I just am like, here's $150. Let me do it. And you're like, yeah, that's a win.

That is basically what the theorem is saying. But that is not Coase's point, right? Coase's point is that we live in a world of transaction costs, and so it's actually going to be in a lot of times really costly and prohibitive for us to actually enter into the bargaining process in the first place. So what's actually important isn't now. A lot of interpretation of this is therefore, yeah, a judge's job is to figure out where GDP goes, right? That's like the Kelo case. Should she have lost her pink little house? Well, under this, maybe because Pfizer wanted to take her house so they could build their factory, would actually bring more GDP to the town. This is of course a very bad idea. It would undermine property rights, but I believe coast's actual point was more. What's missing is sound and understandable property rights in the first place.

Juliette Sellgren 

Once again, I'd like to thank my guests for their time and insight. I'd also like to thank you for listening to the Great Antidote Podcast. It means a lot. The Great Antidote is sound engineered by Rich Goyette. If you have any questions, any guests or topic recommendations, please feel free to reach out to me at Great antidote@libertyfund.org. Thank you.