Drug Dealing, Entrepreneurship, and Drug Prohibition

In my recent televised debate with the UK's Deirdre Boyd, the question came up of whether people involved in the illegal drug trade now would continue to operate -- as drug dealers or other criminals -- following legalization. I argued (video #3) that with all the money that currently goes into the criminal underground through the drug trade not being spent by people in that way anymore, there will be fewer jobs in crime. Illegal drug sellers won't be able to drop their prices enough to compete with the safe and inexpensive alternatives that legalization and regulation will provide for -- a certain level of profitability is needed to make it worth taking the substantial risk involved in being a criminal -- so they would no longer have customers. (Boyd argued that they would turn to "people trafficking," and there was no more time left in the segment, so I didn't get to respond that drug traffickers are investing their money in all kinds of places now, some of them probably illegal and abusive, so the last thing we should want is for them to continue to make even more money from drugs that they'll continue to invest in other places.) A post today in Small Business Trends reports on a study by economist Rob Fairlie which found a statistical relationship between being a teenage drug dealer and being self-employed as an adult. Fairlie accounted for factors like people having less formal education, or having criminal records that would tend to hinder them becoming other people's employees, and found that they didn't explain it. His conclusion is that entrepreneurs in both legal and illegal enterprises have some of the same characteristics. Matt Bandyk has an insightful follow-up on the US News & World Report entrepreneurship blog Risky Business, where he gets to the heart of the matter at hand:

Does drug prohibition change the incentives such that potential entrepreneurs pursue lives of crime rather than legitimate businesses?

My follow-up is to ask the related question: Do the violence and disorder of the illegal drug trade, which exists because of drug prohibition, drive away legitimate businesses that could provide quality job opportunities with the possibility of advancement for bright young people growing up in troubled neighborhoods who want to do something interesting? This is how I see it:

prohibition + continued drug use -> inner city drug crime and opportunity to work in crime crime -> less business investment -> fewer jobs -> difficulty finding work -> poverty crime -> arrests -> criminal records -> difficulty finding work -> poverty poverty -> crime, substance abuse, etc. arrests -> incarceration -> broken family & community relationships, training in crime opportunity to work in crime & training in crime -> people working in crime -> arrests, etc., and on and on and on...

So yes, I'd say that prohibition creates the wrong incentives -- maybe all the wrong incentives.