June 30, 2024
How does prohibition change how producers organize?
I think it’s an important question, not least for the ways it can shed light on the dynamics of traditional, licit, white-market production. What’s especially nice is that the American experience with alcohol prohibition was a genuine experiment. We can “check” on either side of 1920 and 1933 to see how alcohol producers looked before and after. Differences during the Roaring 20’s and the early 30’s we can plausibly attribute to prohibition. This exercise is a familiar one to the Prohibition Era, having been used to great effect by economists to examine changes in violent activity (it went up), changes to the quality control of alcohol (it went down), and changes to the potency of liquor (it went up).
And those aren’t the only outcome variables that economists have examined in the context of prohibition. For an overview, see Mark Thornton’s classic, The Economics of Prohibition. In their various ways, Murray Rothbard, Peter Boettke, Yoram Barzel, David Levy, and Andrei Shleifer and Robert Vishny have sought to understand various aspects of the USSR’s “prohibition economy.” A central focus of that research was why prices in the Soviet Union systematically generated shortages (and why not surpluses). Still others have explained criminal firm organization, though not always in a prohibition context. See Peter Leeson and Doug Rogers’ illuminating “Organizing Crime” for a favorite—also a favorite with my students. Or see basically everything David Skarbek has written.
But probably due to the dearth of traditional data, economists haven’t (to my knowledge) examined how prohibition changes organizational form—whether firms are more or less likely to vertically integrate, for instance.
Until recently, that is. At the 2023 Austrian Student Scholar’s Conference at Grove City College, my student Sebastian Anastasi presented provocative research on firm organization under prohibition. Here’s his abstract:
“I develop a theory of why entrepreneurs would choose to decentralize production processes
and increase rent seeking by examining the case study of alcohol production during the
prohibition era in America. Previous scholarly work has explored why cottage-industry
systems of production would disappear but has not examined why such decentralization
might reemerge. Similarly, the literature on organized crime does not specifically address
why firms would choose to contract out certain tasks rather than carry them out within the
firm. Prohibition radically altered the relevant constraints faced by entrepreneurs. I find
that an increase in the risk of property seizure, a decrease in the strength of the repeat
purchase mechanism, the ready availability of cheap brewing capital, and the ease of
punishing embezzlement all contributed to the emergence of a cottage-industry system of
alcohol production.”
Anastasi argues that the famous “putting-out” production method ought to make a reappearance under prohibition:
“…we would expect a greater decentralization of the production process. The higher risk of property seizure by both the state and rivals would make decentralizing more attractive.
Furthermore, the cheapness and ready accessibility of the capital goods employed in
brewing would mitigate the potential risk of contractors stealing capital goods or causing
accelerated depreciation by poor treatment of the capital goods. The reduced marginal cost
of violence as an enforcement mechanism would also make it easier to punish shirking and
embezzlement. Finally, the crippling of the repeat purchase mechanism would decrease the
necessity of extensive monitoring to ensure uniformity of quality.”
Anastasi both predicts and discovers increased decentralization. On the reemergence of the putting-out system, he writes:
“With the financing of mob boss John Torrio, the Gennas installed thousands of
one-gallon stills in the tenement flats, houses, and spare rooms of the residents of Little
Italy (Schoenberg 1992, 110). The Genna brothers would not only provide Italian
immigrants with stills, but all the necessary ingredients: corn (mash), sugar, and yeast (Sinclair 1962, 203; Kobler 1973, 241; Schoenberg 1992, 110; Binder 2017, 102; The Mob
Museum. n.d. “Bootleggers and Bathtub Gin…”; Kendall 2009). Genna operatives would
also show alky cookers how to tap into gas and water lines which both saved money and
minimized the possibility that police could use the large, metered use of utilities to pinpoint
alky cookers (Schoenberg 1992, 110). The job of the alky cookers was explained by
Schoenberg: “Alky cookers had to spread mash with sugar and yeast, then wait for
fermentation before cooking, then tend the still with some diligence, on pain of carelessness
inducing an explosion” (Schoenberg 1992, 110). In compensation for their efforts, alky
cookers were paid $15 per day (Schoenberg 1992, 110; Kobler 1973, 241). The Genna’s
henchman would pay alky cookers and distribute ingredients on a weekly basis (Binder
2017, 102). Sinclair notes that supplying the necessary corn sugar to an alky cooker would
have cost approximately fifty cents per gallon of liquor. From there, the Gennas, or other
bootleggers engaged in similar operations, could sell the liquor to speak-easy owners at $6
a gallon (Sinclair 1962, 203).
Consistent with the predictions of my theory, the Genna brothers and those who
took over their alky-cooking operation made use of a decentralized production process.
These gangsters chose to contract out to Italian slum dwellers rather than produce in large
production facilities. This diversified their production, making any given police raid less
damaging because it would affect fewer stills. It also made stills harder to find in the first
place as the one-gallon stills utilized by alky cookers were comparatively small and, hence,
easily hidden in the many tenements of Little Italy. As Sinclair notes that the production
of alcohol within the home ‘decentralized the making of bootleg liquor to such an extent
that enforcement became impossible’ (1962, 197).”
The paper is a very impressive effort from an undergraduate student. Watch out for Sebastian when he hits the economics job market in a few years!