The economics of marijuana legalization (plus, a buncha other stuff)

Reflections on the best econ stories from the Twitterverse


Andrew Hetherington/Redux

Thoughts on a few of the more popular economics pieces making the rounds on Twitter.

Trudeau and marijuana: A Toronto Star editorial wants answers from Justin Trudeau on “how legalizing marijuana would work.” In an ideal world, these details would come from a think tank, but Canada suffers from a chronic shortage of think tanks (no pun intended). Although I am a long-time supporter of marijuana legalization (see here, here, here, here and here) I admit there are legitimate concerns about how legalization would affect Canada’s trading relationship with the U.S. Of course, if the U.S. is that dead set against Canadian legalization, it would seem to me we could use the spectre of legalization as a bargaining chip to obtain trade concessions from the U.S. (Keystone XL?). Some of the other questions posed by the Star do not seem particularly relevant. The issue of where marijuana would be sold is a fairly straightforward one for Mr. Trudeau to answer (like alcohol and tobacco, it would be up to the provinces to decide). The health questions are also a little absurd—if we are going to make illegal anything as harmful as marijuana, we should be banning everything from African rock pythons to hot dogs.

I did get a chuckle out of the phrase “[a]cademics (and even newspaper editorial boards) might get by with just being right on the facts.” I was reminded of Thomas Carlyle’s description of economics:

I should say, like some we have heard of; no, a dreary, desolate and, indeed, quite abject and distressing one; what we might call, by way of eminence, the dismal science.

Value Added: My colleague, and fellow Econowatch contributor, Andrew Leach got himself into a little bit of trouble when Twitter discovered he had no idea how the economic concept of “value added” is measured. In Andrew’s defense, I had no idea either. In my mind, the value added by a firm’s operation is: the firm’s economic profit (accounting profit minus any opportunity costs that do not show up on the firm’s income statement) plus the economic profit of the workers (their wage minus any financial expenses they occur from working minus their opportunity costs from a job) plus the consumer surplus customers receive from purchasing the product. There are also probably some externalities we should consider, but who cares about externalities?

Turns out that national accounts measure it quite differently. Consumer welfare isn’t considered at all (typical). Firm profit is measured only net of some accounting costs, and, most disturbingly “value added” assumes workers have no opportunity costs or financial expenses from working! Clearly this statistic was defined by a man that doesn’t have to pay daycare expenses. In applied economics accuracy often needs to be thrown out the window and replaced by what can be measured. This is clearly the case here, where important items that are tough to measure (opportunity costs, consumer surplus) are ignored completely and the resulting statistic only bares a passing resemblance to what we are attempting to measure.

The Great Stagnation:  In “Why the global economy may be doomed to lower growth — maybe forever,” Quartz reporter Simone Foxman gives four reasons why economic growth may be much slower in the future: scarce resources, an aging labour force, stagnant technology growth and externalities from climate change. There are those pesky externalities again! If you enjoy this piece (I did), I highly recommend purchasing economist Tyler Cowen’s 15,000 word eBook “The Great Stagnation.”  At only $3.99, your consumer surplus will be quite high (though I’m not sure anymore what this will mean about the resultant value-added). I find Cowen’s (and Foxman’s) arguments fairly convincing, though as Dan Gardner likes to point out, 50-year predictions are almost always hilariously inaccurate. The point I find least convincing is that technological growth will necessarily be stagnant. Any number of technologies in their infancy could spark the next wave of growth. Maybe it will be test-tube meat. Grow your own bacon at home!

Milton Friedman and quantitative easing: Or, as economist Christopher Ragan phrases it, “Ben Bernanke’s homage to Milton Friedman.” Ragan gives a convincing argument that Milton Friedman would be a fan of the Federal Reserve’s bond-buying program, also known as quantitative easing. In my view, this is unarguably true. Ragan has a tendency to write pieces I wish I had thought of; here he has done it again. Had I written it, I probably would have added this well known Milton Friedman story:

A friend of mine was taking a class by Milton Friedman at the U of Chicago, and after a late night studying fell asleep in class. This sent Friedman into a little tizzy and he came over and pounded on the table, demanding an answer to a question he had just posed to the class. My friend, shaken but now awake said, “I’m sorry Professor, I missed the question but the answer is increase the money supply.”

That’s what I have been reading. Have an interesting article on economics? Please share in the comments.


The economics of marijuana legalization (plus, a buncha other stuff)

  1. Uruguay is legalizing pot fercryinoutloud….Mexico wants to as well….and here we are stuck in the mud.
    How hard can this be? We license wineries and breweries, and we already have licensed pot growers….and a whole lineup of further candidates waiting in the wings.
    The US had alcohol within days of repealing Prohibition…surely doing the same thing with pot isn’t beyond us? Tax it, regulate it, and sell it in liquor stores. Trudeau shouldn’t have to ‘explain’ anything. It’s not rocket science.

    Tyler Cowan’s NEW book is out in Sept, so I have pre-ordered the biggie….and there is no end of new tech we are not employing in Canada. Japan has a 311mph train, electric cars are all over the world, 3D printing is wide open…………we don’t even use robots, yet we have a robotic arm…Dextre…on the ISS! GMO and gene therapy………….!

    “Nearly every business sector relies less and less on manual labor, and this fact is
    forever changing the world of work and wages. A steady, secure life somewhere
    in the middle—average—is over.”

    Average Is Over: Powering America Beyond the Age of the Great Stagnation – Cowan

    • I actually agree with you. This will save a lot of typing for the both of us. :)

      • LOL always a bonus!

    • I agree, legalize the weed. It’ll leave more Dippers and Liberals sitting stoned on their couches come election time.

      • Cons will be at home drunk though. LOL

  2. the idea that any gov’t should in any way profit from any drug including alcohol is absurd – I don’t care one way or another about pot however I am all for getting rid of alcohol – there is no more destructive drug in the world it’s carnage on peoples health physical and realtionship wise, loved ones and the world is quite simply incalculable!

    • Sorry….we already did Prohibition and it doesn’t work.

      You’ll just have to let people make their own choices.

      • no we didn’t canada has never had prohibition of alcohol- good grief Emily don’t tell me you have drank deeply of yankee koolaid too?

    • Conservatives want to get gubment off the backs of people and impose a social con nanny state on the population. Brainless wonders…

      • Yes, all conservatives are social conservatives. Because Ron Waller says so.

      • Yes, Conservative’s want to get the government off their back by creating more laws and interference in people’s lives. You are seriously a genius!

  3. Re: opportunity cost(s).

    Should be implicitly factored into a firm’s cost of capital (weighted debt and equity). Which forms basis for investment decision (hurdle rate).

  4. So if the US bullies us into backing off pot legalization we should get the tarsands pipeline as a consolation prize?? Yeah that makes perfect sense!

    • The way you throw around the word “bullying” makes you sound like a 12 year old girl.

      • You sound like a moron. All the time.

  5. Legalization is the best way to control the distribution. If we do not then we can keep on padding organized crimes bottom line and all the other problems that go with it.

    • Explain how legalization would make it more difficult for anyone to grow in their own home/garden? It’s already illegal to do so, is this another one of those Liberal policies where making something *more* illegal will somehow solve the problem? I thought Liberals were against mandatory minimums for pot possession, so how do they square that circle?

      • 1) I think it would be a good idea if small homegrown quantities were allowed.

        2) I think you are mixing simple personal possession with possession for the purpose of trafficking and possession for the purpose of exporting criminal offences.

        They both have the word possession, but they are two totally different things. One sentence talking points are usually over simplistic and do not give a fair representation to someone’s views.

  6. Why would the US be dead set against legalization here when it’s legal in Colorado, Washington State, and Alaska and used well for medical use in California, and some other states, and since when does Canada HAVE to do what the U.S. freak-bombs tell us to do. Do the representatives of Canada listen to the people of Canada at all? (we know that answer)…..Marijuana cures 7 out of 10 with Cancer while Chemo KILLS 7 out of 10 with Cancer, there are 600 different strains, each one is for a different disease the one high school kids use probably are not one of these good strains. Cheryl Shuman was once in a hospice her life was saved with Cannabis Oil, she’s the Martha Stewart of marijuana, and Morgan Spudlink has also discussed this with Inside Man and Piers Morgan on CNN. It also helps diabetes, kidney fuction, autism, people have to learn and investigate themselves, stop relying on being fed disinformation from the TV and media!

    • The United States of American has a federal government and many state governments. They don’t always agree.

  7. is pot any worse than the high energy drinks(crack cocaine in a tin) ?

  8. I believe there is one big benefit we’ve received from the ”War On Drugs”. Every person who becomes involved in the legalization process and does any research on the subject becomes aware of the lies, obfuscations, and unprincipled strategies of the governments and economic interests who lined up with the prohibitionists. So we’ve got a whole new bunch of savvy people who look at the world and question the mainstream media’s interpretation of the ‘facts’. So as the little girl said “With a pile of horse-excrement that big, there’s got to be a pony for me around here somewhere.”

  9. Why aren’t we told that marijuana is as legal in North Korea as lettuce is in Canada? Koreans in fact prefer smocking weed over cigarettes and even their army is on weed. Anyhow, if you support legalization please see the link and sign the petition.

    Join the Liberal Party’s call for an end to marijuana prohibition.

  10. Definitely one of Friedman’s downfalls. On the whole though, Friedman was great.