Milton Friedman, Nobel Prize-winning Professor (Emeritus) of Economics at the University of Chicago and Hoover Institution Senior Research Fellow, Standford University.

In 1972, almost twenty years ago, President Nixon started a war on drugs - the first intensive effort to enforce the prohibition of drugs since the original Harrison Act. In preparation for this talk today, I re-read the column that I published in Newsweek criticizing his action. Very few words in that column would have to be changed for it to be publishable today. The problem then was primarily heroin and the chief source of the heroin was Marseilles. Today, the problem is cocaine from Latin America. Aside from that, nothing would have to be changed.

Here it is almost twenty years later. What were then predictions are now observable results. As I predicted in that column, on the basis primarily of our experience with Prohibition, drug prohibition has not reduced the number of addicts appreciably if at all and has promoted crime and corruption.

Why is it that the only observable effect on policy of the conversion of predictions into results has been that the government digs itself deeper and deeper into a bigger and bigger hole and spends more and more of your and my money doing harm?

Why is it? That's both the most discouraging feature of our experience and also the most intriguing intellectual puzzle.

In our private lives, if we try something and it goes awry, we don't just continue and do it on a bigger and bigger scale. We may for a while, but sooner or later we stop and change. Why does not the same thing happen in governmental policy?

There is little point in my discussing in detail before this group the case for the legalization of drugs. Everyone in this room knows it. You have had numerous workshops featuring discussions by people who are more intimately familiar with the details than I am. I want rather to examine the puzzle that I raised. And in doing so, I'm going to rely on an adage that Bartlett traces back to 325 B.C.:"Cobbler, stick to your last."

My last is economics, the study of how society organizes its limited resources to meet the many and varied wants of its members. Fundamentally, society's resources can be organized in only one of two ways, or by some mixture of them.

One way is by market mechanisms: from the bottom up. The other way is by command: from the top down. The market is one mechanism. Authoritarian organization - the military is a clear example - is the other. The general gives the order, the colonel passes it on to the captain, and so on down the line. In the market, the orders come the other way. The consumer walks into the store and gives the order and the orders go up. These two mechanisms have very different characteristics and are suited to handle very different problems.

Some element of both mechanisms is needed in any society. And every society has some mixture of both. We know the extreme cases in which authoritarianism predominates and we know what happened in those extreme cases, particularly since the fall of the Berlin Wall. But we also have large elements of both mechanisms in our own society.

During the many years that I've been peripherally engaged in discussing the issue of drugs - I should emphasize that's not a vocation of mine; it's an avocation - I've been impressed by two things. First, most literature that I have read on drugs takes it for granted that the drug problem is a special case to be discussed in terms of specific issues associated with drugs - the substances involved and so on - rather than a special instance of a more general phenomenon. It is taken for granted that the drug problem has to be discussed in terms of its own merits and requires an extensive knowledge of the details.

From my point of view, it's as if one were to discuss the problem in terms of the object stolen. So, theft of automobiles is one problem. Theft of hand bags is another. In the same way, people treat the prohibition of drugs as if it were a problem to itself.

Second, one consequence of that approach to the drug problem is that many opponents of the war on drugs propose alternatives that would be just as bad. They believe that the problem is not the basic mechanism being used, but simply that the government hasn't done it right. Most of these alternatives would involve going from the frying pan to the fire.

Such reformers believe that if they could write the law, the law would be enforced the way they wrote it. That is an illusion. What happens to a law has little relation, in general, to the intentions of the people who wrote it. The people who wrote the law on drugs did not intend to kill hundreds of thousands of people in the process. They did not intend to have a system under which prisons and prisoners would grow like Topsy. In general, the actual effects of any law are often, if not usually, the opposite of the intentions of the people who wrote it, a phenomenon that Congressman Richard Armey (R-Texas), in an earlier guise when he was a simple professor, termed the "invisible foot of government."

Let me illustrate with a few quotations from letters that I have received. First: "Instead of merely decriminalizing drugs, let's have the government make available drugs free to every user." That would obviously take the profit out of the business. The idea is that some how or other we ought to treat drugs as a free good. But there are no free goods; there's no free lunch. It's not free; someone would have to pay for it. So, we ought to tax the taxpayer to subsidize people who use drugs! More important, it seems obvious that if those "free" drugs were really available, they would be distributed in Europe and elsewhere where there's a paying market.

How can you restrict the quantity demanded of free drugs? The only way to do so is to have strict rules for distributing it. That leads to an authoritarian system determining who gets the drugs and how much - as open to abuse and corruption as our present system.

Second - I promise you, these are honest-to-God quotes from letters I have received; I haven't made them up - "Legalize all drugs now illegal to be available in state stores." We have a lot of experience with state stores in the liquor area. The Twenty-First Amendment repealing the Prohibition Amendment repealed only federal prohibition; states were left free to engage in any measures they wanted to control alcohol. Indeed, the Twenty-First Amendment specifies that transporting alcohol or liquor from a dry state to a wet state shall be regarded as a federal offense and shall be prevented by the federal government. Some states stayed dry, at least for a while; others set up state liquor stores; and still others left it to the market.

The people who say drugs should be distributed only in state stores argue that that would facilitate control of distribution to minors, to ensure that drugs weren't abused, and so on. Has that been the effect of state liquor stores? Hardly. I know about the state of New Hampshire best because we used to have a second home there. Some New Hampshire stores are located right on the border of Massachusetts in order to attract as many customers from Massachusetts as possible. As that indicates, state stores give government an incentive to promote, not discourage, the consumption of alcohol. In addition, many states have now discovered that they are not really doing very well with the state stores and there is a movement on to sell them off and privatize them. Again, it's a silly idea.

Third: "Abolish the criminality of the use of drugs; establish a federal monopoly to sell drugs." That is, you're going to have the Post Office handle the distribution of drugs.

What do these solutions have in common? They propose to cure a problem caused by socialism by some more socialism. It's the standard recourse of the alcoholic: more of the hair of the dog that bit you to get over the inevitable hangover.

The fundamental problem we face is not the war on drugs - although some of us are most interested in that issue. The war on drugs and the harm that it does are simply manifestations of a much broader problem: the substitution of political mechanisms for market mechanisms in a wide variety of areas.

To illustrate, I want to go beyond the war on drugs. We all recognize that the war on drugs in destroying our inner cities. But if I were to ask any one of you what is the next most important factor that is destroying inner cities, I suspect that a great many would agree with me that the next most important factor is our defective educational system, the terrible schools in our inner cities, schools which do not teach, but which are essentially places to keep kids off the streets for a certain number of hours a day.

Both failures have the same source. The war on drugs is a failure because it is a socialist enterprise. Our schooling is deteriorating because it is a socialist enterprise. Except possibly for the military, education is the largest socialist enterprise in the United States. There are a few loopholes: private schools to which parents can send their children if they can afford to pay or, in the case of parochial schools, if they have certain religious views. However, ninety percent of all kids are in governmental schools. And that socialist institution performs the same as most other socialist institutions.

There are some general features of a socialist enterprise, whether it's the Post Office, schools, or the war on drugs. The enterprise is inefficient, expensive, very advantageous to a small group of people, and harmful to a lot of people. That was true of socialism in Russia, it was true of socialism in Poland, and it's true of socialism in the United States.

You all know Adam Smith's famous invisible hand, in which people who intend to promote their own interest are led by an invisible hand to promote a public interest which it was no part of their intention to pursue. That is the case regarding drugs.

Whose interests are served by the drug war? The U.S. government enforces a drug cartel. The major beneficiaries from drug prohibition are the drug lords, who can maintain a cartel that they would be unable to maintain without current government policy.

In education, one major set of beneficiaries from the socialized educational system are high-income people, living in affluent suburbs, who are able to have good public schools. Those government schools serve as a tax shelter for them. If they send their children to private schools, the tuition they pay is not deductible in computing their federal income tax; but local taxes are deductible. Another set of beneficiaries are the educational bureaucracy, including officers and employees of teacher's unions, and politicians who are able to use the educational system as a source of patronage.

On the other hand, a great mass of people are harmed by the low and declining quality of our schooling system. And the people who are harmed worst of all are the people who live in the inner cities. They know it. In public opinion polls on privatizing the school system through vouchers that give parents freedom to choose, blacks are the most supportive group, with two-thirds or more favoring a voucher system. Yet, with the exception of Polly Williams of Wisconsin, not a single important black political leader has come out in favor of vouchers!

These are by no means the only examples. Go down the list of our major national concerns, of which the crime and lawlessness spawned by drug prohibition is certainly one and poor educational performance another. We have major problems in medical care. Total costs for medical care have risen from four percent of the national income to thirteen percent in forty years. Why? Again, because the government has increasingly socialized medical care and there is a very strong movement to go all the way to a complete socialization of medical care. Largely as a result of greater government involvement, the cost of a day spent in the hospital, cost per patient day, was twenty-six times as high in 1989, after adjustment of inflation, as it was in 1946.

Another example is housing. why does the Bronx in New York look like a war zone that's just been bombed? Primarily because of rent control. Again, an attempt by the government to socialize the housing industry. We have had extensive and expensive public housing programs. In the course of those public housing programs, more dwelling units have been destroyed than have been built.

I challenge you to find any major problem in the United States that you cannot trace back to the misuse of political mechanisms as opposed to market mechanisms.

By any reasonable measure, the United States today is a little over fifty percent socialist. That is to say, more than fifty percent of the total resources in the country, of the total input, is directly or indirectly controlled by governmental institutions at all levels - federal, state, and local. Yet we in the United States have the highest standard of living of any country in the world. We are a very rich and prosperous country. It is an extraordinary tribute to the productivity of the market system that, with less than fifty percent of the resources, it can produce the kind of standard of living and the kind of society we have.

You are working from January 1 to close to June 30, or maybe somewhere after June 30, to pay for the direct or indirect cost of government. What fraction of your well-being comes from those government-controlled expenditures? Is it anything like fifty percent? I doubt very much that any of you would say it is.

The question that my puzzle raises is why is it that private enterprises are successful and government enterprises are not? One common answer is that the difference is in the incentive, that somehow the incentive of profit is stronger than the incentive of public service. In one sense, that's right; but in another, it's wrong.

The people who run our private enterprises and the people who run our government enterprises have exactly the same incentive. In both cases, they want to promote their private interests. The people who go into our government, who operate our government, are the same kind of people as those who are in the private sector. They are just as smart, in general. They have just as much integrity. They have just as many altruistic and selfless interests. There is no difference in that way. But as Armen Alchian, an economist at UCLA, once put it, "The one thing you can depend on everybody to do is to put his interest above yours". That is a very insightful comment.

The Chinese who are on the mainland are not different people from the Chinese who are in Hong Kong. Yet, the Mainland is a morass of poverty and Hong Kong has been an oasis of relative well-being. The people who occupied West Germany and East Germany before they were reunited had the same background, the same culture. They were the same people, but the results were drastically different.

The problem is not the kind of people who run our governmental institutions versus those who run our private institutions. The trouble, as the Marxists used to say, is in the system. The system is what is at fault.

The difference is that the private interest of people is served in a different way in the private and the governmental spheres. Consider the bottom lines they face.

Here's a project that might be suggested, to begin with, by somebody in the private sector or by somebody in the government sphere, and appears equally promising in either case. However, all good ideas are conjectures; they are experiments. Most are going to fail. What happens? Suppose a private group undertakes the project. Suppose it starts to lose money. The only way that they can keep it going is by digging into their own pockets. They have to bear the costs. That enterprise will not last long; people will shut it down. They will go onto something else.

Suppose government undertakes the same project and its initial experience is the same: it starts to lose money. What happens? The government officials could shut it down, but they have a very different alternative. With the best of intentions, they can believe that the only reason it has not done well is because it has not been operating on a large enough scale. They do not have to dig into their own pockets to finance an expansion. They can dig into the pockets of the taxpayers. Indeed, financing an expansion will enable them to keep lucrative jobs. All they need to do is persuade the taxpayers or the legislators who control the purse that their project is a good one. And they are generally able to do so because, in turn, the people who vote on the expansion are not voting their own money; they are spending somebody else's money. And nobody spends somebody else's money as carefully as he spends his own.

The end result is that when a private enterprise fails, it is closed down; when a government enterprise fails, it is expanded. Isn't that exactly what has been happening with drugs? With schooling? With medical care?

We are all aware of the deterioration in schooling. But are you aware that we are now spending per pupil, on the average, three times as much as we were thirty years ago, after adjustment for inflation? There's a general rule in government and bureaucratic enterprises: the more you put in, the less you get out.

As these socialized enterprises have broadened their reach, it has become more and more difficult for the public to control them. That's the fundamental problem we face in respect of drugs. How do we make the vested interests of the government change their policy?

As we have all discovered, that is not an easy job. The people running the drug program have a great deal more resources than we have. They can command the attention of the media to make reform or repeal seem not respectable, not reasonable. After all, they will say over and over, the people who urge the legalization of drugs are simply ignorant or naive or don't understand what's going on. We, they will say, are the experts and know what works and what doesn't.

One way that has been effective in eliminating or reducing bad government programs is private competition. The Post Office used to be just as inefficient in delivering parcels as it is in delivering first-'class mail. But because the postal statutes gave it a monopoly only on first-class mail, UPS was able to take away their business. Then Federal Express and similar enterprises took away much of their first class business, and substitutes for mail such as fax emerged.

The same process is underway in drugs. Unfortunately, however, private competition is not an effective solution as long as the government completely prohibits some drugs - just as first-class postage proper is still a government monopoly, because it is illegal for private enterprises to offer similar general carrier services. In such areas, we do need to change the law.

My thesis can be expressed in two main points, and that is where I want to close and open up to questions from you. First, do not fool yourself into thinking that solutions will in fact work that simply involve changing the way the political mechanism is used. They will not escape the defects common to the political mechanism wherever it is used.

Let me emphasize, I am a limited-government libertarian, not an anarchist libertarian, though I have a great deal of sympathy for anarchist libertarians, including the fact that my son is one. However, the role I assign to the government is limited to defending the country, providing law and order, helping us to determine the rules under which we operate, and adjudicating disputes. This is a very limited range of responsibilities.

A major cost of the broader extension of governmental activity is that it prevents government from doing well those things that I believe only it can do effectively. When people talk about innocent victims of the war on drugs, they very often forget the people who suffer robberies, theft, murder - not because they are caught in the crossfires of drug battles, not because they are victims of addicts who are trying to support their habit, but simply because so large a fraction of law enforcement resources are being used to try to control drugs that there are not enough resources left to prevent theft, burglary, and the rest in the community at large.

The second lesson I believe that we should learn, and it's probably the more important lesson, is that we are likely to make more progress against the war on drugs if we recognize that repealing drug prohibition is part of the broader problem of cutting down the scope and power of the government and restoring power to the people. If we treat drug prohibition as an isolated instance, maybe the effort to repeal it will be successful, as the effort to repeal alcohol prohibition was in the 1920s. But I believe that our chances of success are greater if we recognize that the failure of the war on drugs is part of a much broader problem, that the reason to end the war on drugs is also the reason to end socialization of medicine, the socialization of schools, and so on down the list.

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This chapter is adapted from Prof. Friedman's keynote address presented at the Fifth International Conference on Drug Policy Reform in Washington D.C., on Nov. 16, 1991.