Introduction: Mark Thornton is Senior Fellow at the Ludwig von Mises Institute, with articles published often in the Mises Daily. He serves as the Book Review Editor of the Quarterly Journal of Austrian Economics and was a member of the Editorial Board of the Journal of Libertarian Studies. He has served as the editor of the Austrian Economics Newsletter and as a member of the graduate faculties of Auburn University and Columbus State University. He has also taught economics at Auburn University at Montgomery and Trinity University in Texas.
Mark served as Assistant Superintendent of Banking and economic advisor to Governor Fob James of Alabama (1997-1999) and he was awarded the University Research Award at Columbus State University in 2002. His publications include The Economics of Prohibition (1991), Tariffs, Blockades, and Inflation: The Economics of the Civil War (2004), The Bastiat Collection (2007), and The Quotable Mises (2005). Mark Thornton is a graduate of St. Bonaventure University and received his PhD in economics from Auburn University.
Anthony Wile: Hi, Mark. One area you specialize in is prohibition economics and, in fact, you recently debated the war on drugs at Oxford Union (read here). Last time we talked with you, we spoke of cannabis and prohibition and the evolution of legal marijuana – especially in the US. Can you give us a general update on the state of prohibition in the US today?
Mark Thornton: The movement to legalize cannabis – a global ideological movement – is proceeding at a very good pace. Since we last spoke the states of Oregon and Alaska have legalized recreational marijuana, as well as Washington DC. Medical marijuana legislation continues to be passed. The vote in Florida failed, but only because it needed 60% and only got 58% of the vote. Federal legislation is moving through Congress that would allow individual states to set their own policies, without fear of reprisals, regarding medical marijuana use and medical marijuana research. Ideologically, support for legalized cannabis continues to strengthen with the latest poll registering 60% support. Demographically, support for legalization is even stronger because only the oldest and least educated demographic groups continue to support prohibition of cannabis, while younger and smarter segments strongly support legalization.
Anthony Wile: You spoke at the Mises University on the Economics of the Drug War, which has certainly been a global "war." The UN General Assembly Special Session on Drugs in 2016 (UNGASS) is expected to essentially rewrite international policy drugs and end prohibition and, thus, the drug war. What will the outcome of that look like in terms of the drug war and related economics?
Mark Thornton: The Mises University is a week-long instructional conference in Austrian economics held at the Mises Institute. Students receive an introduction to the methodology and application of economic theory. College students naturally want to see how Austrian economics is applied to the global drug war to answer questions like why has pot become so potent and how does the war on drugs explain why young children from Central America are smuggling themselves into the US. The Austrian approach is different and, in my view, it comes to the correct conclusions and answers.
I am not sure what will come out of UNGASS, but I certainly hope that it involves real reform and downgrades the war on drugs to at least a "harm reduction" mode that would accept the commercialization of marijuana and a medical approach to the harder drugs. I have written several articles for the Mises Daily on Mises.org that shows that when the War on Drugs is downgraded, it leads to improvements in all social indicators.
Anthony Wile: How much influence will the eventual UNGASS policies have on prohibition in the US, or any individual country, for that matter? Do you expect countries to come in line after the new strategy is announced, or perhaps move faster toward regulation before that, as some are already doing?
Mark Thornton: I wrote an article for Mises Daily where I pointed out that marijuana legalization in Colorado (and elsewhere) is basically the people nullifying federal and international law. There was a subtle dare in the article to President Obama to use federal resources to enforce the federal marijuana prohibition in Colorado. I asked the question: What would this do to President Obama's legacy? How would you like to be known as the last President in history to defend the totally irrational prohibition of marijuana and hemp, especially if you are known to be a former pot smoker yourself? What happens if the people of Colorado used jury nullification to nullify the laws in the courts? He would be a laughing stock! Pandora would be out of the box and a great libertarian revolution would be unleashed.
Despite some government propaganda to the contrary, I have also written an article showing that most people know that legalization has worked in Colorado.
I think the same situation applies at the UN. Most of the important countries have already decriminalized marijuana consumption. There is political unrest in many of these countries and great economic uncertainty. The social mode is negative. There is a need for new sources of tax revenues and jobs. Full legalization for marijuana is therefore a real possibility coming out of the UN. Plus, they must recognize that drug prohibition is causing failed states in places like Central America. While the UN is largely a symbolic form of government, a strong recommendation coming out of the special session could provide the political cover for governments to make quick reforms, for example, making it more likely that governments would adopt true legalization instead of de facto consumer legalization or decriminalization.
Anthony Wile: Where do you think this war ends – with full legalization around the world?
Mark Thornton: I would think that it would end with full legalization of most drugs, with maybe a few drugs only available from doctors, pharmacists and addiction treatment clinics in some jurisdictions. Think about Vietnam. We just left in disgrace. Twenty years later Vietnam is capitalistic, prosperous and is a "friend" of the US. We could do the same thing with the war on drugs. Declare victory and drop the whole thing.
Anthony Wile: How do you see the pushback from law enforcement in the US? Is it effective? How will law enforcement come to terms with the new realities of cannabis? Already LEAP, Law Enforcement Against Prohibition, is quite vocal and appears to be growing in membership.
Mark Thornton: I think that most police officers would be fine with marijuana legalization. Most of them don't like to think of themselves as nannies, breaking up parties and ruining lives and families. However, today that is a big part of their jobs. The good police officers would prefer their self image to be more like Bat Man, Spider Man and Super Man—coming to the rescue of people in trouble because of real criminals. The really smart police officers are already on our side. The less intelligent ones still think they are serving the public interest by enforcing drug prohibition.
However, the police unions and the private prison companies oppose legalization and they finance the political opposition to legalization ballot measures. The alcohol and pharmaceutical companies also finance the political opposition to legalization because they see it harming their profits as well. All this money is funneled into phony political campaigns with names like "concerned parents," "people for safety and responsibility" and even names with religious connotations.
Anthony Wile: Last time you said the best solution to our neo-prohibition was outright legalization. Can you expand for us?
Mark Thornton: The type of legalization in Colorado and Washington are messy and filled with various layers of government interventions including taxes, license fees, regulations, local option (e.g., not every county in Colorado can have a retail outlet), zoning, advertising restrictions, etc. This creates problems such as high prices that keep the black market alive. It also creates moral hazards, where people think the government is making things perfectly safe for them and they let down their guard as consumers. These interventions also slow down the process whereby growers, producers and retailers get "weeded" out by competition and we end up with a small number of big suppliers who have a lot to lose if consumers are hurt by their products.
Anthony Wile: You also said, "The economic benefits of legalizing marijuana and hemp are enormous and … a legal industry partly controlled by 'the globalist cabal' is still better than what we have today." Can you expand?
Mark Thornton: I do think the economic benefit of legalizing marijuana and hemp is enormous. However, after additional thought, I'm no longer sure about the cabal part. Big Pharma + FDA and Big Banks + Fed are types of cabals. If I had a button that, if pressed, would make Big Pharma and/or Big Banks disappear, I think I might push it. I would certainly make the FDA and the Fed disappear if I could.
Anthony Wile: You've predicted the market will change. Is this change already taking place?
Mark Thornton: Yes it has. ZIRP does induce investment and this investment is what makes the US economy look okay and keeps the GDP number in positive territory. However, many such investments are malinvestments and this means they will not produce the anticipated benefits or revenues to make the investments profitable in the long run. You can already see this somewhat in the commodity space in such areas agriculture goods, energy and mining.
You can also see it in the luxury goods space. Luxury and opulence are signs of bubbles. While the real median household income has been declining, luxury spending is very positive and noticeable. The stock market is at all time highs, but the performance of the consumer discretionary stocks, e.g., luxury goods producers, has gone even higher. Over the last five years consumer discretionary stocks have beat the S&P 500 by 65%! This is another indicator that you have bubbles and paper wealth, rather than a building up of economic growth and real wealth. My skyscraper index is also on high alert for a global economic crisis.
If you are talking about the marijuana market in Colorado, yes, there are changes there, too. There are now electronic marijuana cigarettes, packaging and labels have been changed so that things like marijuana brownies are safer to consume, and there are emerging standards of etiquette for "pot" luck parties, new medical applications have been developed, tested and refined. You can look forward to much more to come from this market.
Anthony Wile: You said the next economic crisis will "speed things up" when it comes to ending prohibition. Still believe that?
Mark Thornton: Yes, I do and for several reasons. The first is that legalization produces real jobs and increases in tax revenue. The second and most important reason is ideological. People are more libertarian and less statist today than in many decades. This ideological factor is being fueled by demographics. Younger, smarter and tech-savvy people tend to not see government as a solution, but as a hindrance or the problem. Older, less educated people tend to be more nationalistic and "patriotic" and hence are often fooled by government propaganda and false flags. Also, more people know about Austrian economics, which at its most basic level is the science of why a libertarian society works for the benefit of all people, with freedom, peace and prosperity.
The third factor is that there is a negative "social mode" all over the planet including Asia, Europe, the Americas and even maybe Australia. This means that even the dullest thinking and most nationalistic people are more likely to support libertarian solutions like legalization than when the social mode is positive. The economic crisis will only intensify these forces to enact libertarian reforms.
Anthony Wile: We see this sector as having promising investment potential. You indicated that we ought to keep our eye especially on larger corporations. Are you expecting involvement from the cigarette companies? How will that come about and when?
Mark Thornton: New industries are chaotic so picking long-term winners is extremely hard. I can see a hedge fund or venture capitalist setting up a team in Denver and making money by picking and developing market winners. These initial winners can then be sold to the large tobacco and pharmaceutical corporations for huge profits (big corporations have the assets for marketing and distribution already in place). So, a marijuana mutual fund might be the way to go.
However, I can also see Mark Thornton buying a bunch of penny stocks and ending up with a zero balance in his marijuana stock account. From automobiles to personal computers, the market is chaotic in the early stages and often plagued by con artists. However, eventually we end up with a small number of firms that produce good products at low prices.
Anthony Wile: Speaking of investment potential, let's move on to the larger market. We figure we have about a year or two until the next collapse – though fortunes will doubtless be made in the meantime. You have a timeline.
Mark Thornton: I kind of agree with your timeline and the skyscraper index agrees with your timeline, too. My predictions come true about 99% of the time, but I'm usually way, way too early in my predictions. Today, I can see a possible topping pattern in the major stock indexes. However, that has already happened several times and the central banks have rescued stock markets. My mistake was that I never thought central bankers would act so recklessly for such a long time. They have backed themselves into a corner and with no good options. I would hope they now realize what they have done, but they seem clueless and still firmly committed to money printing and debt monetization. This is a scary situation but remember, it may also be the best opportunity we have ever had to get rid of the Fed and fiat money!
We also seem to be getting close to a potential large redeployment from stocks and bonds into commodities and precious metals sometime this year.
Anthony Wile: We truly live in unusual times. This market seems an entirely artificial one, driven by monetary policy not by any underlying economic strength. In fact, in July 2014 an interview with you was titled "A Sham Recovery." Your thoughts now, nearly a year later?
Mark Thornton: I do think it is a sham recovery. Seven years of ZIRP and QE? We have nominally met all the Fed's own targets to start normalizing interest rates, but they continue to retreat and delay any such increase in rates. It seems that the Fed can't raise interest rates until the entire world is in a state of economic perfection or nirvana.
The Fed has engineered stock and bond market bubbles in an effort to give people confidence in the economy. The Fed is always playing a "confidence game." Basically they have flooded the economy with money and credit. They and their fellow central bankers have driven interest rates to all time low levels and even negative rates! These low rates divert savings from saving accounts, money market mutual funds, CDs and bonds into stocks and junk bonds. The slightest hint of higher interest rates from the Fed sends stock markets into volatile gyrations.
Anthony Wile: The US government has such tremendous facilities at its disposal now between the Fed, the CIA, etc. Is the economy getting more and more controlled? Has the narrative superseded the reality?
Mark Thornton: The economy and society are more and more controlled and the government has destroyed virtually every aspect of our rights and liberties. Sure, I might not have every one of my rights violated each day, but the point is that the government reserves the right to violate all my rights. Likewise, a slave may not be shackled and beaten every day and may appear to be able to move about freely and to go unbeaten, but that does not change the fact that he is a slave. We are slaves.
The saving grace is that the economy continually moves faster than government control. The Fed and the CIA are powerful, but they are also almost completely inept. So as they wield their power they also display their incompetence. The worse government gets, e.g., spying on all Americans, the more people turn towards Austrian economics and libertarian political philosophy, as well as alternative media such as The Daily Bell. Therefore, ideologically we are stronger today than at any point in the last century.
Anthony Wile: Where does it all end – and what's the point? Control?
Mark Thornton: I don't know, but I'm betting my view as a short-run pessimist and long-run optimist will be a good description of our future. The recipe is that the worse states become, the more libertarian the people become. In the end, governments must have the consent of the people. So I'm betting that we will win.
Anthony Wile: Is the idea to deepen and widen corporate control until it extends worldwide, ushering in a more internationalist era?
Mark Thornton: Most definitely! The world is increasingly run by a corporatocracy. The big corporations increasingly write the legislation, write the rules and regulations, finance the campaigns and even hold public offices. At first glance, this may sound like a good thing but it is not. Corporations want laws and regulations that favor themselves, not small business, potential competitors, labor or consumers. Trade agreements, which are always advertised as "free trade agreements," are typically little more than our corporatocracy's technique of extending its control of government power beyond the borders of the United States.
Anthony Wile: Are there deeper forces at work that are not easy to see, like the BIS in Switzerland?
Mark Thornton: Most definitely. There are such forces that are usually up to no good, like the military-industrial complex and the CIA in the Middle East, but the BIS does not seem to be playing the bad guy lately. They have published some sound economic analysis, have noted the implications and dangers of central bank policies and when the chief economist recently retired he spilled most of the beans on the central banks. They have spilled just enough beans to absolve the BIS from blame. Maybe they are positioning themselves to become the world's new central bank after the next crisis occurs? If that is the case, I see your point.
Anthony Wile: Central banks are said to have poured some US$50 trillion into the world's economy in the past six years. That's not normal or natural. What does this kind of monetary distortion do to the larger economy?
Mark Thornton: Monetary distortions of unknowable types and extents, but certainly some of the distortions are relatively obvious. It has made it possible for governments to borrow enormous sums at low rates. It has made it possible to create enormous investments in real estate, technology, social media, transportation and luxury good production. Austrian theory tells us that monetary distortion includes the adoption of more roundabout production processes. A direct process would be me walking across the street to your house to deliver my recipe for chocolate cookies. A more roundabout production process would be for Apple to design the iPhone, get 35 companies to produce parts which are shipped to China for assembly and then further shipped to Verizon stores, where I buy an iPhone, take an image of my recipe and text it to you so that you can then make cookies. So there was a tremendous expansion in trade, shipping, container production and port facilities over the last decade. The Baltic Dry Shipping Index, which is a measure of how much it costs to ship goods across the oceans (and also how much is being shipped) hit an all time high of almost 12,000 during the housing bubble and has recently been as low as 500. Typically, the index runs between 1,000 and 2,000 in normal cycles.
Anthony Wile: We are seeing high-end asset bubbles in the West – and certainly in Asia. Do these not eventually presage another crash?
Mark Thornton: Yes. That is why I follow skyscraper construction. It's the ultimate in "high end" good! Record setting skyscrapers are expensive luxury goods that are usually built on the prime real estate at the peak of big bubbles. I have explained why such records coincide with peaks using Austrian economics.
Anthony Wile: Will we see a worldwide currency soon? Is it possible such a currency could be driven by a stock market crash? In other words, is the current ascension being engineered in order to create a crisis that will usher in a new paradigm?
Mark Thornton: I think the movement to unseat the US Dollar as the world reserve and trading currency has been more successful than anyone expected, but it could still take a long time for currency crisis in the major currencies to establish an open movement for a world currency.
Anthony Wile: Any other thoughts? Websites or book references?
Mark Thornton: I encourage everyone to visit us at Mises.org and to sign up for the free daily article from the Mises Daily. Check out the Mises Economic Blog. On Facebook you can "like" us and see what is going on at the Mises Institute. You can follow us on Twitter @Mises and you can follow me @DrMarkThornton.
Anthony Wile: Thanks for your time.
We appreciate Mark's time in speaking with us again and sharing his perspective on the coming end to the War on Drugs as well as on the global corporatocracy. His classic book on topics we discussed here, The Economics of Prohibition, is available for download from Mises.org, here.