For Pot, Inc., the Rush Begins – and so does the Crony Capitalism

Basic economics dictates how the market can be controlled by politicians and big business to benefit the few at the expense of the many, and that’s exactly what’s happening as New York begins the process of legalizing medical marijuana. Who are the few that will reap the biggest rewards?

In order to implement market controls (note: this is NOT free market capitalism), you must restrict access. From the New York Times story (emphasis mine):

The State Health Department, she said (State Senator Diane J. Savino who was a sponsor of the bill passed last summer), had not yet written guidelines for the medical marijuana program, and the licenses available for companies keen to participate would be few and costly.

That way, only the most well-connected and wealthy can participate.

You tax it heavily:

We can probably take in a couple hundred million dollars a year, minimally,” she said, referring to potential tax revenue.

Um… who do you think is paying those taxes? Consumers who have medical needs. How considerate!

You restrict supply to artificially inflate prices:

When Gov. Andrew M. Cuomo signed the Compassionate Care Act in July, it gave the Health Department 18 months to come up with regulations and choose up to five companies to grow and dispense medical marijuana.

Application costs alone could run to several hundred thousand dollars; start-up costs could top $20 million.

Oh, and did I mention price fixing?:

New York’s health commissioner will set the price of the drug, probably based on the street value.

Which of course means that the street value will adjust dynamically to keep as many black-market customers as possible, and the centrally planned and controlled pricing will never catch up due to bureaucratic lag. This means the black-market will continue to thrive whilst the “legal” market will be strangled and uncompetitive. Capitalism is responsive to market drivers, such as demand vs. price. Socialism (central control by so-called authorities) abstracts the supply from the consumption, which means critical market indicators are disconnected.

And the cronies are all lined up:

Now, for the state’s would-be growers, private equity investors, labor unions, lawyers, lobbyists, consultants, branding firms, suits, stoners and hucksters, the rush is on.

This is the moment when old-guard legalizers meet a new breed of capitalist.

Yep! That new breed? Crony-capitalists!

  • Patrick McCarthy, a lobbyist & once an aide to Gov. George E. Pataki and executive director of the New York Republican State Committee
  • Dean Petkanas, was chief financial officer at Stratton Oakmont
  • Derek Peterson, a former senior vice president at Morgan Stanley Smith Barney (who hired Senator Harry Reid’s son Rory as a lobbyist)
  • The Governor of NY

    Richard N. Gottfried, a Democratic state assemblyman cited an unwritten formula of government regulation:

    “When you make a statute very restrictive — and the governor did that in the last hours — you raise the stakes and create a need for more lawyers and consultants

  •  Cannabis industry cash has begun to flow into New York. Ms. Savino said her campaign donations from out-of-state growers were “around $10,000 or $15,000 — not much.” (But it’s the thought that counts, right?)
  • Unions have also claimed a share. In New York, all licensees will be union shops, a result of two years of lobbying by the United Food and Commercial Workers International Union

And one last big crony-capitalist play – use government regulations to control unwanted competition:

…at the Cannabis and Hemp Association meeting, the aspiring moguls had a regulatory request for Ms. Savino. They wanted more regulation, not less (talking about over-the-counter remedies being sold as non-psychoactive hemp oil or CBD oil)  … Such products are largely unregulated and sell for as much as hundreds of dollars for a small amount. Could the state crack down on them?

Most telling quote in the whole article:

Ms. Savino pulled a bottle of something called Green Cures CBD Oil from her purse, eying it skeptically. “People believe what they want to believe,” she said. “It’s hard to protect people from what they think will help.”

And people thinking that this crony-capitalist “legalization” will help anyone in New York will find that in the long-run it helps no one except those who exploit the voters, tax payers, and consumers, such as politicians, lobbyists, bankers, and union bosses.



Legalize Heroin–It’s the Christian thing to do |

Legalize Heroin–It’s the Christian thing to do |

“But perhaps the best reason to legalize hard drugs is that people who wish to consume them have the same liberty to determine their own well-being as those who consume alcohol, or marijuana, or anything else. In a free society, the presumption must always be that individuals, not government, get to decide what is in their own best interest.”

3 Business Lessons From The Sinaloa Drug Cartel (Revisited)

English: Money seized during "Project Cor...
English: Money seized during “Project Coronado” by the DEA. Going in “La Familia Michoacana” article. (Photo credit: Wikipedia)

An article posted by Devin Liddell on  Co.Design has a sub-title “Innovate Like a Syndicate”, but the conclusions of the article show a huge leap in the application of legitimacy to a business model that is wholly illegitimate.

To sum-up the articles main points:

  • There are cartels that have out-lasted traditional brick-and-mortar business for generations
  • Cartels have insanely high margins on products
  • Individuals working for cartels have a huge profit per employee when compared to traditional businesses
  • Profits happen despite efforts of governments and law enforcement to shut down cartels
  • Cartels achieve all the above due to a superior culture when compared to Fortune 500 companies

Let’s address these points using some basic economics and common sense.

Cartels, much like monopolies, are in business due to government participation, not in-spite of it. Were it not for the State restricting competition, as well as restricting the supply of products, prices and profits would plummet. Therefore it’s in the best interest of the cartels to persist the adversarial role of the State. The State restricts competition by making it extremely costly to get involved in illicit businesses, and winnows out the weak by raising the cost of entry into the marketplace through police power. This serves to maintain the established cartels position of power and prominence.

Cartels don’t have the compliance burdens imposed by the State, nor the tax burdens – giving them a much greater profit margin potential only dreamt of by most brick-and-mortar companies.

But lets talk about the main points of the article, ” these culture-driven brands have three key attributes”:

  1. Credo: “Actionable and authentic values” whereby these cartels “have distinctive rituals, symbols, and artifacts to express their credos”, giving them some kind of supposed “authenticity” (unlike corporate motivational posters). Like most hierarchical models of business, the corporate culture is designed to insulate those at the top from competition from those below, while at the same time concentrating wealth and power in the hands of the few at the top. It’s the same for cartels that exist outside of traditional law and cultural mores. Unlike traditional corporations, violation of these “Credos” is not just fatal to your career, but to you and your family. Very motivational!
  2. Improvisation: To sum up, find ways around impediments to your distribution network, then diversify your income streams. Sounds like basic business strategy to me.
  3. Small-but-big: While I agree that small and agile is good given my background managing software development and agile methodologies, the structure implemented by cartels is more likely due to risk mitigation. When the police show up and bust your operation, they only capture an isolated cell, leaving the vast bulk of the operation intact and productive. It’s merely a byproduct that this structure can also very efficient.

In  summary, Mr. Liddell makes the following statement, ” legitimate businesses wish they had the cultural clarity and business results of these underworld organizations”, and I’m sure some do. More to the point, it’s about results. To get similar results, but to do it in a fashion that does not use the illegitimate power of cartels (or the State) will require an environment for business close to what the cartels operate under. How about the following as a start:

  • Minimize or repeal all corporate taxes
  • Relieve businesses of the incredibly burdensome compliance requirements from all the alphabet-soup of state and federal agencies
  • Understand that cultural values are inculcated from society, not corporations, and good citizens and workers become so because they are raised that way – not at the point of a gun
  • Get the State out of business, as it creates massive economic distortion wherever it interferes

Oh, and there’s only one way to defeat those pesky cartels, and that’s to take away their government enforced monopoly.

The original article is here.