How Cocaine Defies the First Rule in Economics

· Economics
Top economics journalists try to explain why cocaine is getting cheaper, despite stable demand and decreased supply, with shaky results. Colombia’s Vice-President adds in underhanded marketing to steady the equation.

By Shared Responsability.
Picture “Blu” by mc.

Bogotá. It all started with an article written for The Atlantic Monthly’s July/August edition by Ken Dermota and published last Wednesday. That same day, the Wall Street Journal’s Informed Reader blog summarized Dermot’s detailed fundamental analysis, in which cocaine is treated like any other commercial product, and that attempts to rationalize dropping street cocaine prices in the face of constant demand and falling supply. According to Robin Moroney, WSJ’s Informed Reader blog writer, The Atlantic Monthly attributes these reasons to the drop:

  1. Changing distribution methods – It’s no secret that neither coca farmers nor street dealers make the drug trade’s many millions. The middlemen, who presumably assume the risk in transporting drugs from where they are produced to where they are sold, are the ones who get rich. Now, it seems, smugglers in cities like New York are going to Colombia themselves to get cocaine, then offering the drugs at retail prices in the U.S.
  2. The Mexico factor – Trade with its southern neighbor is increasing, opening up opportunities for drug traffickers to get cocaine into the U.S. in steady and smaller (less risky) amounts.
  3. Flexible labor – In what may seem like a far-fetched theory, The Atlantic posits that the drug dealers imprisoned in the nineties are now getting out of jail and, for lack of other work options, are falling back into their dealing drugs ways and are willing to do so for less money.
  4. Perceived threats – Finally, the new focus on terrorism prevention that law enforcement agencies are taking has shifted man power and resources away from drug enforcement. This, according to the Atlantic, has made dealing drugs less risky, and, thus, less profitable.

Picture “Making cocaine” by Jonny.

The U.S. Drug Enforcement Agency claims that in 2005 a gram of cocaine could be obtained for 20-25 USD in New York, 30-100 USD in Los Angeles and 100-125 USD in Denver, Colorado. In 1983 that same gram was worth 600 USD, dropping to 200 USD by around 1998. This price drop coincides with a steep reduction in the hectares of coca in Colombia, from 200,000 to 79,000, and with an increase in demand for cocaine in Europe, which has presumably redirected drug shipments away from the U.S.

While The Atlantic’s reasons, unquestioned by the WSJ’s blog, certainly help explain cocaine’s falling street prices across the U.S., not everyone is convinced., a Condé Nast business publication, still has two tough questions left.

The first question is the one Dermota explores in his article, which asks how cocaine’s price is defying basic supply and demand laws by going down while demand flatlines and supply decreases. Felix Salmon,’s market blogger, considers it unanswered.

Salmon’s second question asks big – with prices so low, then why isn’t demand for cocaine going up?

A question of pricing

Picture “Cocaine and me!” by Impeding doom.

In an interview with Science Magazine conducted just two months ago, Colombian Vice-President Francisco Santos was asked similar questions, geared more towards the European market, but the answers to which nevertheless apply. His approach to the problem inverts the temporality of the question — it is precisely because demand is steady, that prices are dropping, posited the Vice-President.

“The drug trafficking business acts like a multi-national. It develops new markets, seeds new consumers, creates new infrastructure.” Like any salient enterprise, the drug trade is widening its market, reducing the price of the drug so that it is available to more people. A strategy that has earned drug traffickers big profits in Europe.

In the Old Continent, where prices have also dropped, consumption rates have increased and are now almost par with those in the U.S. No longer is cocaine the exclusive drug of the wealthy few; more and more, it is the common drug of the comfortable many.

The real battle then does not so much hinge on economics as it does on psychology. Cocaine’s price is dropping while its audience, at least in Europe, is widening — that much has a plausible explanation. What is harder to explain is why Europeans have developed such a liking to the drug while U.S. consumers seem to be over it.

One possible argument for this is that U.S. consumers aren’t over cocaine. In New York, where a gram of cocaine goes for as little as 20USD, Nuremberg’s Institute for Biomedical and Pharmaceutical Research (IBMP) found that some 16.4 tons of cocaine are consumed per year by testing the levels of a cocaine metabolic by-product flowing through the Hudson River. This number is much higher than the levels found anywhere else in the world, including in the rivers of Madrid and London, where consumption has shot up. Perhaps, similar tests should be conducted in other U.S. cities to reformulate the North American nation’s consumption levels.

If actual consumption levels in the U.S. are higher than what officials believe, then it would seem that lowering the price of cocaine did in fact affect the drug’s demand, as it did in Europe. Still to be explained though is the reason for cocaine’s recently increased popularity, in the U.S. and particularly in Europe.

White but dirty

Picture “¡Maldita cocaina!” by Richach1980.

France’s top drug authority attributes the increasing popularity of cocaine, at least in part, to the false view that cocaine is a clean drug. Or, as he calls it, that it is the champagne of drugs – glamorous, elegant and relatively harmless. A reputation not imparted on so-called designer drugs, like ecstasy, MDMA, hallucinogenic and other chemical-based drugs. What consumers ignore is that cocaine is the result of a process where highly toxic chemicals are used to transform the coca plant into what ends up in the street.

Also partly to blame are reports of celebrity cocaine use, which also serve to misleadingly glamorize the drug. As is the case in England, Scotland and Ireland, cocaine residue is being found in an alarming number of regular pubs in middle class neighborhoods. Now that cocaine is cheaper, more people can afford to follow in the footsteps of cocaine-using celebrities, footsteps often viewed and irresponsibility portrayed as sophisticated.

Finally, with increasing use of amphetamines, the dangers of an amphetamine overdose received much attention from parents and the press, but the dangers of cocaine use, even if casual, have not been given the necessary attention in recent years. Only now is the media’s and educator’s attention refocusing on communicating the cerebral, respiratory, cardiac and circulatory risks involved with cocaine consumption, because no matter how minor consumption may be the consequences are always major.

Shared Responsability is a Colombia-led initiative for illicit-drug producing and consuming countries to work on shared solutions to the threat that cocaine production, trafficking and abuse poses to the world.

Cite this article:

How Cocaine Defies the First Rule in Economics. Shared Responsability. Bogotá, June 16, 2007. Link: Republished by “Colombia Passport: Economics, Society and Culture in Colombia”, Sihanoukville, June 30, 2007

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