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The economics of illicit drug markets
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In a kind of convenient shorthand, people often refer to Dr Chris Wilkins as an illicit-drug researcher. This is true, as far as it goes, but a more adequate description would be that he is a New Institutional Economist with a particular interest in stateless economic systems such as illicit drug markets.
[ Click here to download a PDF of the original printed version of this story ]
In a kind of convenient shorthand, people often refer to Dr Chris Wilkins as an illicit-drug researcher. This is true, as far as it goes, but a more adequate description would be that he is a New Institutional Economist with a particular interest in stateless economic systems such as illicit drug markets.
New Institutional Economics (NIE) is an economic school which studies the role institutions play in economic behavior and performance. These include formal institutions such as the law and the state, and informal institutions such as social custom, norms of behavior and ideology. “ NIE looks at the institutional context of economic behaviour,” explains Wilkins. “It looks beyond the workings of demand, supply and pricing to examine how institutions, property rights, social convention and transaction and information costs affect the decision-making of economic actors and the performance of economic systems.”
New Institutional Economics is particularly suited to the study of ‘stateless economies’: economies where there is no state to enforce contracts or property rights, and this includes illicit drug markets. In his PhD thesis Wilkins looked at the workings of cannabis markets, where, in the absence of legal enforcement and remedies, cheating might be expected to be widespread. But Wilkins found these markets were typified by generally reliable transacting between buyers and sellers. The reason, says Wilkins, lies in the search and information costs associated with these exchanges. “ In the legal economy exchange is generally impersonal. In the supermarket you don’t know the person at the till and you may not even deal with cash. In the cannabis black market the buyer typically knows the seller, can inspect the product, and hands over cash. It is very personal, very face-to-face.”
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Image via Wikipedia“In the clandestine illicit drug market it can be quite difficult for buyers and sellers to find one another. Legal commodities are advertised, and there are public retail outlets. In the cannabis market it is difficult to obtain information about the location of sellers, and the quality and prices of products. It takes some effort even for experienced buyers to assess the options available in the market. This means that in cannabis markets both the buyer and the seller make a significant time investment in the exchange relationship, and that constrains cheating to some extent. If a cannabis seller cheats a customer, then that customer won’t return, and that’s potentially a big loss.”
In a recent paper, Wilkins and Professor Sally Casswell explored the role gangs play in outdoor cannabis cultivation in New Zealand. The analysis in the paper suggests that gangs are unlikely to have complete monopoly control of cannabis cultivation – cannabis is too easy to cultivate and rival cannabis cultivators and cannabis crops too hard to deter and detect – though Wilkins is quick to say this does not mean the gangs do not have persuasive advantages elsewhere in the cannabis market, or when it comes to other drugs. In their paper Wilkins and Caswell set out the conditions under which an illicit drug market most favours the involvement of organised crime. These occur where there are cost advantages from larger-scale production, where there is a need for specialised skills, capital equipment or large amounts of start-up capital, and where there are visible targets for violence aimed at discouraging competition. While a few seeds, some potting mix and a secluded patch of ground are all that is required to cultivate cannabis, manufacturing methamphetamine is a much more technical and sophisticated process , says Wilkins. “You need to have access to the appropriate precursor chemicals and have the knowledge and equipment required for manufacture.”
Anecdotally, ‘cooks’ – the amateur chemists who manufacture methamphetamine – have became much sought after. Highly skilled, they can command premiums, and such is the demand that kidnappings are not unknown.
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Image via WikipediaStories have circulated that gangs traditionally at odds are co-operating in the methamphetamine market. “Working together may be a rational way of gaining access to rare precursor chemicals and to exchange manufacture techniques.”One of the flow-on effects of the rise in the use of methamphetamine may be to extend the power and influence of New Zealand’s gangs, in much the same way that Prohibition once strengthened the hand of the Mafia in America. If this is happening then it will mirror trends that have been seen internationally. A report by the United Nations Office of Drugs and Crime has noted a shift away from “a loose network of independent laboratory operators towards larger organisations able to produce more and better drugs at lower costs. The larger groups are more flexible, and are able to identify and exploit any lucrative business opportunity, as well as any flaws in law enforcement efforts. They assist each other to more efficiently produce, market and distribute their products.”
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Image via WikipediaWilkins is the current recipient of a Fast Start grant from the Marsden fund to investigate which illicit drug markets nurture the development of organised crime.
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