Definition

Alcohol prohibition was a period from 1920 to 1933 in the United States of America where the manufacture, transportation, and sale of intoxicating beverages was made illegal.

Alcohol Prohibition

The national prohibition of alcoholic beverages in the United States of America lasted from January 16, 1920 to December 5, 1933. This period of time has become known as the “Noble Experiment,” a phrase coined by President Herbert Hoover. Alcohol prohibition was instituted by the 18th Amendment to the United States Constitution, which stated, “the manufacture, sale, or transportation of intoxicating liquors within, the importation thereof into, or the exportation thereof from the United States and all territory subject to the jurisdiction thereof for beverage purposes is hereby prohibited.” The Volstead Act was put into place for the purpose of enforcing this constitutional amendment. The experiment was meant to alleviate the various social ills that many perceived alcoholic beverages created such as violence, crime, corruption, and poor health.

In theory, prohibition would reduce consumption, which, in turn, would be followed by a reduction of these social problems. To judge this policy from an economic perspective, we look at whether or not this end goal was achieved. From this perspective, the “Noble Experiment” is often seen as failure.

It is interesting to note, however, that economists right before alcohol prohibition in the United States were primarily for prohibition. Their arguments rested on a belief that a sober society would outcompete heavy-drinking societies. Economist Irving Fisher’s three books on the subject, 1927s Prohibition at its Worst, 1928s Prohibition Still at its Worst, and 1930s The Noble Experiment, all provided statistical evidence for the increased efficiency of prohibition and argued that the failures are a result of suboptimal enforcement. Fisher even claimed he could not find a single economist opposed to the prohibition of alcohol. Perhaps it was hindsight that changed this perception, as few would look back on alcohol prohibition as a success. The overwhelming empirical evidence and a look at economic theory clearly illustrate the difficulties alcohol prohibition had in successfully achieving its ends.

While alcohol consumption did decrease in the 1920s, prohibition did not help achieve the stated goals of prohibition. In fact, in a 1991 essay entitled “Alcohol Consumption During Prohibition,” Miron and Zwiebel estimate that while consumption fell to 30% of the pre-prohibition level in the 1920s, it steadily rose throughout the rest of the prohibition era, reaching about 70% of the pre-prohibition level. And this occurred despite increased enforcement efforts.

From a theoretical standpoint, this is not surprising. Prohibition is a supply-reduction policy, which shifts the supply curve up and to the left. This leads to a reduction in quantity demanded; however, it also leads to an increase in price. The higher price offers a compensation for the increased risk prohibition creates in continuing to operate in the market. In other words, the increases in enforcement efforts do lead more risk adverse individuals to exit the market; however, the higher prices provide incentives for more daring entrepreneurs, and those more adept at using violence and secrecy, to remain or enter the market.

The prohibition also had a profound effect on the quality and nature of the goods within alcohol markets. Quality tended to fall dramatically as consumers turned to the black market or to produce their own in order to meet their demand. The largest effect is what Richard Cowan referred to as the “Iron Law of Prohibition,” which states that the greater the level of enforcement, the greater to potency of the goods in question will become. Within the alcohol market, this meant a shift away from lower alcohol by volume drinks, and thus bulkier, such as beer and wine, toward higher alcohol by volume drinks, such as whiskey.

Tellingly, economist Mark Thornton in a 1991 study entitled “Alcohol Prohibition was a Failure” analyzed the effectiveness of alcohol prohibition at achieving its stated goals of increase public health and decreasing crime. He found that prohibition had no discernable effect on public health, and perhaps more shockingly, he found that there was an increase in the crime rate, particularly among homicides. Thus, we must judge alcohol prohibition as having failed to accomplish its goals. These findings echo the work done by Clark Warburton at the tail end of prohibition with his 1932 book The Economic Results of Prohibition.

Fortunately, America’s experiment with alcohol prohibition ended with the passage of the 21st amendment. After which, there was a dramatic reduction in crime, including organized crime, and an increase in health, jobs, and prosperity for all Americans.

Cross-References