Narconomics: How to Run a Drug Cartel

by Tom Wainwright

First, there is an overwhelming focus on suppressing the supply side of the business, when basic economics suggests that addressing demand would make more sense. Cutting supply has done more to raise prices than it has to reduce the amount of drugs consumed, resulting in a more valuable criminal market. Second, there is a constant and damaging short-termism, in which governments economize on early interventions, preferring to run up bigger bills further down the line. Prisoner rehabilitation, job creation, and treatment for addiction are among the first programs to be cut when budgets are tight, while front-line enforcement, which accomplishes the same goal at a higher cost, seems to enjoy spending without end. Third, even though the drug cartels are models of nimble, borderless global commerce, efforts to regulate them are still clumsily national in scope. The result is that the industry survives by slipping from one jurisdiction to another, easily outwitting the uncoordinated efforts of different countries. Finally, and most fundamentally, governments mistakenly equate prohibition with control. Banning drugs, which seems sensible at first, has handed the exclusive rights to a multibillion-dollar industry to the most ruthless organized crime networks in the world. The more I learned about the way the cartels do business, the more I wondered if legalization, far from being a gift to the gangsters, could be their undoing.

Cartels play a role more like that of large supermarkets, buying produce from farmers, processing and packaging it, and then selling it on to consumers.

But Colombia’s armed conflict is such that in any given region, there is usually only one group of traffickers that holds sway. That group is the sole local buyer of coca leaf, so it dictates the price, just as Walmart is sometimes able to set the price of the produce it buys. This means that if the cost of producing the leaf goes up—owing to eradication, disease, or anything else—it will be the farmers who bear the cost, not the cartel.

Governments are approaching the cocaine market as if it were the chocolate market, in which a rise in the price of cocoa beans leads to a corresponding rise in the price of chocolate bars. In reality, it is more like the art market, in which the tiny cost of the raw materials is insignificant compared with the high price of the finished product. Attempts to raise the price of cocaine by forcing up the cost of coca leaves is a bit like trying to drive up the price of art by raising the cost of paint.

But a perverse economic consequence of tightening up the border is that each crossing point has become more valuable.

I ask Miguel why he is allowing so much space between cars when he stops at traffic lights. “In case of a shootout,” he shrugs. Red traffic lights are a favorite place for hit men to assassinate their targets, so having a few feet between you and the car in front could be the difference between escaping and being hemmed in.

Sometimes, James Bond–style plots are undone by Mr. Bean–style pratfalls. In one deal, the smugglers set up an elaborate plan to import cocaine packed into special tubes that are attached to the hull of a ship, to be recovered by frogmen. The drugs are successfully concealed, and the ship arrives in the Dutch harbor. But the whole scheme is foiled when the divers come down with a nasty bug, leaving them unable to get into the water. The cocaine is abandoned—and may still be traveling the world, strapped to the bottom of some tanker or other.

Prison is fabulously expensive. Sending a teenager to jail costs more than it would to send him to Eton College, the private boarding school in England that educated Princes William and Harry. It seems especially odd that the United States, a country with a proud history of limited government, is so unquestioningly generous when it comes to this particular public service, on which it blows $80 billion a year. Does it really need to lock up five times as many people per capita as Britain, six times as many as Canada, and nine times as many as Germany?

Fans of The Sopranos will be pleased to hear that the earliest formal study of the Italian mafia was all about food. Franchetti examined two professional societies of millers based near Palermo, the island’s capital. Under normal market conditions, the millers would have competed with each other on the price and quality of their flour. Customers would have bought the flour that was cheapest and of the highest quality. But the millers soon realized that there was an easier way to run their industry. Rather than compete, they decided to collude, taking turns to cut back on their production in order to create scarcity, charging higher prices than they would otherwise have been able to do. In other words, they formed a classic cartel.

Why are drug dealers so serious about customer service on the web, when they are so bad at it offline? The reason is that a Dark Web marketplace such as the Silk Road or Evolution is much more like a conventional market than a network economy. Sellers advertise their products openly, and buyers are free to compare the full range of prices being offered. Buyers and sellers alike can trade with everyone else in the market, rather than just with the people they know. This means that the need for a “network” vanishes—which in turn means that there is no longer much of an incumbent advantage. Sellers are forced to compete more seriously on price, quality, and customer service, rather than being able to stay in business simply because they have built the rare set of contacts required to make it work.

The average price of the drug in the United States has fallen by more than two-thirds following Mexicans’ ramping up of supply. And the manufacturers seem to be taking their cues from Breaking Bad: blue crystals, Walter White’s signature product, reportedly command a higher price than the regular off-white variety (unlike White, manufacturers apparently fake the blue effect by using food coloring).

The quantity of powerful opioid drugs being dished out by doctors is breathtaking: in some states, concentrated in the South, the number of prescriptions made each year is now greater than the population.

The claims of scarce cash must seem odd, though, to anyone visiting the small New Hampshire town of Keene. Keene is not a violent place. Between 1999 and 2012, it saw only three homicides. Yet its police department has spent nearly $286,000 on an armored personnel carrier known as a BearCat. Asked why a town like Keene needed a vehicle better suited to trundling around Baghdad, the police chief explained that it would be used to patrol Keene’s “Pumpkin Festival and other dangerous situations.

The time has surely come to try out more “varieties of ways” of tackling the drugs industry. Until there is a radical change in strategy, business conditions for the mafia will remain promising. Half a century after Nixon’s war was declared, sadly, there has never been a better time to run a drug cartel.