What Does Drug Dealing Tell Us About Small Businesses?

Scott Shane just blogged about a fascinating study by Rob Fairlie, an economist at the University of California-Santa Cruz. Fairlie was interested in entrepreneurship in the black market and how it relates to legitimate entrepreneurship. So he looked at data regarding drug dealers, and he found that they were 10 to 11 percent more likely to become self-employed in legitimate businesses than people who weren't drug dealers.

Now you might say that this should be expected—people with criminal backgrounds might have fewer chances to be hired by someone else, so they have no choice but to work for themselves. But Fairlie crunched the numbers and discovered that structural factors like education and incarceration can't explain the difference. This led him to an explanation that might make some people uncomfortable: The same personality traits and skills that draw people to becoming "businessmen" in the drug trade also lead them to be regular small-business people.

Interestingly, Shane blogged on this subject at the same time that U . S . News published a debate on whether it is time to end the "war on drugs."

Shane says:

Increasing the number of productive entrepreneurs may depend a lot on creating better incentives for those with entrepreneurial preferences and talent to become productive entrepreneurs instead of turning to a life of crime.

This makes me wonder how many gang leaders, drug dealers, and mafia kingpins in prison could have been entrepreneurs doing the next new, new thing if they had been exposed to the right incentives.

So I'll go ahead and ask what Shane seems to be hinting at: Does drug prohibition change the incentives such that potential entrepreneurs pursue lives of crime rather than legitimate businesses?

On one hand, those who call for the legalization or decriminalization of drugs have long argued that the drug war directly fuels the crime around the drug trade that it seeks to fight by creating a massive black market. The high profits in this black market attract people who might otherwise become legitimate entrepreneurs to deal drugs. Fairlie's study shows that there's some empirical support to this argument—these drug dealers wouldn't just all be unemployed vagrants or petty criminals if not for the drug trade. They really do possess a lot of the same qualities that the family that runs your local mom and pop store possesses.

On the other hand, supporters of the drug war can use this research as evidence that legalization or decriminalization of drugs would not do very much good. They might say that it proves that the lack of good jobs in poor areas is a bigger cause of crime than drug prohibition, and so we need policies that directly expand economic opportunity.

So what's the more entrepreneur-friendly policy—ending drug prohibition or continuing it?