The state is destined to fail if it tries to restrict the supply of something that people want to buy. Intervention only drives up the price and encourages criminality
Last Sunday I took my young son Marcus to the zoo to see the rhinos. Marcus likes them because they look like surviving dinosaurs. I worry that soon they will all be gone so we go to see them quite regularly. On the way home we detoured so I could buy some Bombay duck. This is a type of dried fish that you eat with Indian food. Once a staple of the curry house menu, it has been banned in Europe since 1997 but luckily I know a shop that sells it under the counter.
Later, whilst eating my curry, I was reflecting that Bombay duck, rhinos and black market Olympic tickets all have something in common; they are examples of supply intervention failures ie doomed attempts by well-meaning public officials to inhibit the supply of something that people want to buy.
The whole of human history tells us one thing loud and clear; if there is a willing supply and an affluent demand, then the market will thrive irrespective of attempts by the state to intervene. The recent Olympic ticket scandal is hardly news and I am pretty sure that at the very first Christian versus lions play-off final at the Coliseum there was a shifty looking Italian standing outside saying ‘any spares? I’ll buy or sell’.
The main consequence of supply intervention is, of course, to drive up the price and encourage criminality. We see this with Bombay duck. When it appeared proudly on the Taj Mahal menu under ‘sundries’, it cost £2.50. Now that it has acquired a furtive under-the-counter status it costs £5.00. It’s the same stuff just twice the price, and the EU’s attempt to ban the trade has only succeeded in making nice Mr Khan a criminal.
If the supply is limited, the effect of this inevitable increase in price is catastrophic. Rhino horn is just a type of fingernail but trades at $133 per gram, which is more than gold. This is because 1.2 billion Chinese people mistakenly think it has magical qualities and can act as an aphrodisiac.
Because of this hike in the price, the number of wild rhinos has plummeted and there are just 24,000 left or one for every 25,000 jaded Chinese chaps looking to perk up their marriages. This is a decline of over 50,000 rhinos since 1950, which is pretty compelling evidence that attempts to limit the supply have failed.
For drugs, the human cost of supply intervention failure is much higher. Around 54,000 people have been killed in the Mexican drugs war since 1980. This is more than the numbers killed in the Iraq and Afghanistan wars combined, but I don’t see mass protests in London against weekend cocaine users.
I think we persist in all of these futile attempts to limit markets because we conflate the concepts of desirable or undesirable outcomes with inevitable ones.
One of the most misunderstood figures in history was King Canute. He knew that he was not omniscient and that the tide would inevitably come in. He only got wet to try and dissuade his fanatical supporters of their belief in his power.
In the same vein, I think our politicians and civil servants know that supply intervention is ultimately futile but dare not admit this to Middle England who want tough action on drugs and don’t like the idea of rich people pushing their way to the front of the queue for tickets for the 100 metres.
This fear of admitting there is a limit to the effectiveness of state intervention blinds us to alternative solutions. We focus on trying to prevent the inevitable existence of markets rather than delivering supply in less harmful ways.
The obvious answer for rhinos is to farm them and harvest their horn once a year. This can be done at no harm to the rhino and would ensure the survival of the species at least in farms. The biggest gold producer in the world has a market capitalisation of $49bn and makes $4.4bn in profits. In this context, imagine what the world’s biggest rhino horn producer would be worth and how much capital would be deployed to save the species.
The obvious answer for ticket touting is to let the sporting institutions auction off a percentage of the tickets for any event on the open market and hand over the profits above face value to charity.
The obvious answer for Bombay duck is to legalise the supply and let that nice Mr Khan go back to making curry.
I don’t think there is an obvious answer to drugs but I do think it would be a start if we had a wider disapprobation of high-profile users. In the eighteenth century, sugar consumption was frowned upon in educated liberal circles not because it made you fat but because of its connection with slavery on sugar plantations. It would be helpful if people made similar connections between celebrity drug abusers and thousands of dead teenagers in the slums of Mexico City.
So in conclusion, I am resigned to watching the Olympics on the TV whilst half the bankers I know seem to have mysteriously got lucky in the lottery. I am resigned to little Marcus only ever seeing a rhino in a zoo despite the millions being spent on tackling poaching and I am resigned to the fact that one day the trading standards people will clamp down on Mr Khan.
There are alternatives to all of these scenarios but I don’t have much faith in our willingness to implement them. You can’t buck the market or turn back the tide but I think we will continue to ask our politicians and civil servants to spend a lot of time and money trying.
Michael Ware is corporate finance partner at BDO