June 16, 2008

The Economics of Selling Drugs

author_brad By Bradley Wright

One of the joys of doing social research is the constant exposure to empirical data. I can’t count the number of times that I was sure that the world worked in one way only to be corrected by data (and sometimes my research corrects others’ misperceptions).

Here’s a great example of how actual data about a topic can correct prevailing misconceptions. I think that most people in society would view drug dealing as a fairly lucrative business. Illegal drugs, such as cocaine, heroin, marijuana, are bought from growers and resold at a substantial mark-up. Somebody has to be making lots of money, no? Stories of drug busts often emphasize the enormous amounts of money involved. In movies and television, drug dealers usually seem to live on yachts and have private airplanes and waiting, chauffeured cars. 

Well, it turns out that once social scientists actually measured how much money that drug dealers were making, the results suggested that most dealers work for close to minimum wage. That’s right—that make about as much money selling drugs as if they were working at McDonalds or at the mall.

The best known study of the drug dealers’ finances was conducted by Levitt and Venkatesh. While they published it as an academic article, it is best known from a chapter in their best-selling book Freakonomics. What’s unique about this research is its data. Venkatesh, a sociologist, spent years living with a crack-dealing gang in Chicago.

(Check out the video clip of Venkatesh describing some of his work on the right.)

In the process of getting to know the gang members, Venkatesh was given financial records covering four years of the gang’s activities. These were the accounting books of the gang—the amount of drugs sold, expenses, and the pay given to each member of the gang. This remarkable data gave insight to the inside workings of a drug-dealing street gang.

The data indicated that the gang received its money from selling drugs, collecting dues from its members, and extorting individuals and companies doing business in the gang’s turf. The majority of money came from selling drugs. The gang’s expenses went to buying the drugs, hiring mercenary fighters, giving money to the gang hierarchy, paying for funerals for its members, buying weapons, and paying its members.

The picture that emerged from the wage data was one very similar to a conventional corporation. A few members made lots of money, but the majority made barely enough to live on; in fact, some of the dealers had to live with their mothers because they couldn’t afford to move out. The actual hourly wage earned by a gang’s foot soldier—the person on the street making the sales—ranged from $2.50 to $7.10 an hour (in 1995 dollars). That’s not much money at all. The gang leaders or “officers” did much better. They earned from $32 to $97 dollars an hour. These are data for one local gang. The central gang, which oversaw the local gangs much like a company would oversee its franchises, made substantially more money. As with a regular, legal corporation, the low-level workers of the gang did most of the work but the high-level members received most the pay. 

An interesting question arises from these data: Why do foot soldiers sell drugs for so little money? Any job has its potential costs—a worker at McDonalds might get sore feet, occasional grease burns, and probably some weight gain—but selling drugs is extraordinarily dangerous. The death rates in Venkatesh and Levitt’s sample was 7% annually. That means that, on average, about 1 in 14 gang members was killed. Why would anyone risk so much for so little?

A standard sociological answer would hold that the gang members had few opportunities for legitimate wages. In addition, the sample members spoke of being foot soldiers as a way of stepping up to becoming an officer of the gang and make much better money. Just as a college student might work in the mail room of a large corporation, in order to start climbing the ladder, these gang members started with selling drugs on the street for near minimum wage pay.

Despite the considerably different cultural context between gangs and corporate America, it seems that they share a lot of similarities. Both have hierarchical pay scales that represent inequality, and both have individuals willing to suffer through the lower ranks in hopes of getting to the higher ranks.

Who would have thought? 

Want to learn more? Here’s a presentation by Steven Levitt about this research.

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Comments

It is good to have the ability to read a good quality blog with useful data on topics that a lot are interested on. The point that the data indicated are all first hand on actual experiences even help more. Continue doing what you do as we love reading your work. 
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Hello dear.You have written a great post. Going to share with my followers on twitter. Thanks for sharing.

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