How Crypto Markets will Undermine Government Control: Drug Markets

Posted by: Evan Faggart June 20, 2014

The American war on drugs has been raging long before its “official” declaration by Nixon during the Vietnam War. The real war on drugs started in 1937, when the United States Congress passed the first marijuana prohibition legislation in the history of the United States. This legislation marked the beginning of the United States government’s endless campaign to control and regulate what individuals put into their bodies. Threatening citizens with hefty fines and jail time, the government works tirelessly to ruin the lives of those who decide to ingest substances that the government deems “dangerous” or “immoral” and to induce terror in anyone who may be thinking of trying any of the said substances. Such is the nature of tyrannical government, they must exert control over the minds and bodies of their citizens; they need obedience, not freedom. Tax revenue and complicit agreement with incessant inflation does not require the freedom of choice. In fact, freedom of choice often contradicts the efforts of our power-hungry governments to reap unthinkable profits at the expense of everyone else. Therefore, governments have a massive incentive to regulate what we consume.

Naturally, these prohibition efforts by the US government, and the governments of the world, have failed miserably. As a general economic rule, a market will always exist as long as there is both the accumulation of social capital and a demand for the banned good. That is why black markets for goods spring up immediately whenever a government outlaws the good. Until now, these markets have been necessarily violent and aggressive. However, with the development of distributed, peer-to-peer networks, technology has given rise to online drug markets, markets that are completely anonymous and decentralized. In these drug markets, money does not trade hands in the physical world; moreover, the money is not even traditional money. These Deep Web drug markets use Bitcoin, a completely decentralized monetary system that is free from the control of any government. Deep Web drug markets are bringing about a paradigm shift in the drug trade. These markets will completely undermine government attempts to regulate what individuals buy and consume. In this article, we will discuss a few of the myriad ways in which these markets will be successful in their resistance against such grandiose displays of government violence.

Market Demand and the Division of Labor

The main failure of governments in their attempts to eradicate a certain good or service from the “white” market is that they cannot fully kill the market if they are unable to extinguish completely the demand on the market for the good that is being banned. As long as people desire to purchase and use these goods, there will be entrepreneurial producers who will ignore the prohibition and take advantage of the opportunity for black market profit. The only two differences between a government-created black market and a white market are that (1) the businesses have been– until the development of Deep Web black markets– necessarily violent and forceful; (2) in removing an industry from the white market, the government is successful in partially restricting the progression of the division of labor in that industry. The latter is what will be discussed presently, the former will be covered later on in this article.

The division of labor allows for an increase in both the quality and quantity of output per one unit of input. Through the division of labor, the consumers on the market can buy more and better goods for less money, thus increasing the overall standard of living for society as a whole. In banning a good, the government cannot completely eradicate the demand. It can, however, stunt the expansion of the division of labor. What this produces is a reduction in the quantity and quality of the good demanded. That is why drug markets tend to be stocked with a fairly abundant supply of medium to low quality products while access to extremely high quality products requires a much higher price. However, the Deep Web drug markets, such as Silk Road and the other Dark Net Markets, have facilitated the expansion of the division of labor even under the present circumstances of government prohibition.

Sometimes, smaller drug dealers who may be working independently of a street gang or criminal organization may be both a producer and a dealer. Because of this, that individual must use the revenue made from selling his products to pay for the overhead of his production process. This cost means that the dealer can only produce as much as he can within his limited budget and limited physical space. As a result, he has less money to invest in producing higher quality goods and cannot produce as much of these goods. Silk Road changed that, however. As a recent study shows, between 31% and 45% of the purchases made on Silk Road were high price-quantity sales, which strongly suggests that these purchases were made by drug dealers. This means that Silk Road made it possible for dealers to buy their supplies independently from criminal organizations; as a result, the division of labor can expand without growing the violent control of the South American drug cartels. Also, the small-time dealer can expand his business as well. Rather than worrying about overhead for his production operation, the dealer can put all of his resources into procuring higher quality products in a higher quantity. From this investment, he can increase his prices and sell to more people. While all of this peaceful trading is going on, the violent cartels are losing power, meaning that the drug trade is becoming increasingly less violent. There is, however, an aspect of Deep Web drug markets that can reduce drug trade violence even more so than the facilitation of the division of labor

Dispute Resolution

Governments have a monopoly on the legal system, on dispute resolution. Therefore, when a government bans an industry from operating on the white market, that industry loses access to the only method of dispute resolution available in the economy. And as we know, the market won’t disappear completely as long as there is still demand. Thus, the people who will take over the production and distribution of the illicit substance will necessarily be people who are willing to operate outside of any peaceful system of dispute resolution. Consequently, the method of problem-solving to which these businessmen will resort is violence. This is why the drug trade has been notoriously violent. It has nothing to do with an inherent characteristic of the drug trade or drugs in general.

The first Silk Roads and the other Dark Net Markets that came along after, have worked to eliminate the violent methods of dispute resolution that have historically prevailed in the elicit drug market. Dark Net Markets administrators mediated disputes between individuals buying and selling on the Dark Net Markets. The First Silk Road also implemented a reputation ranking system, much like that of ebay, to let potential buyers know who the most reliable vendors were. These features, combined with the removal of the need for physical space in which to conduct transactions, eliminated the need for violence whenever a dispute arose. We have never heard of any Dark Net Markets cartels beheading people and sending the video to the families of the victims, or of shootouts over Dark Net Market deals that went sour. This online, Deep Web drug marketplace legitimized the drug trade for the small niche of individuals that used the website. Extended to its logical extreme, such drug markets can completely legitimize the drug trade regardless of whether or not governments decide to legalize drugs. The current DNM’s took these policies of peaceful dispute resolution and improved them; the second incarnation of Silk Road went as far as to repay the funds lost by customers in a security breach earlier this year. We are seeing a shift in the way individuals are conducting themselves when buying and selling drugs that the world’s governments consider unfit for consumption. Before, these governments worked to instill fear in the minds of the individuals by teaching them that the drug trade was inherently violent, and that participating in it would inevitably lead to your eventual death. They then reinforced these claims by killing and imprisoning anyone that they caught buying, selling, or consuming drugs. The Deep Web is changing everything, it is slowly turning drugs into a peaceful and lucrative enterprise.

Decentralization, encryption, disrepute resolution, and reputation tracking. These are all features that are provided by both the simple nature of the Deep Web and the entrepreneurial spirit of those who operate these drug marketplaces. Competition keeps the marketplace administrators on their toes; one slip up means a loss in customers and subsequently a loss in revenue. Because of this competition, the various Deep Web drug markets are constantly improving their services. At some point in the future, these markets will likely overthrow the monopoly on the drug trade held by the South American cartels, which are supported by the worldwide prohibition of drugs. These online operations will completely legitimize the drug industry regardless of whether or not the governments give their blessings. This is an innovation in anarchy, and it is proving every day to the population at large that voluntarism can and does work.

Updated: 2014-06-20