By Chris Walsh
Steven Levitt has spoken with a half-dozen cannabis professionals over the past few years, and he’s come away with a distinct impression of the marijuana industry and the people fueling its explosive growth.
“My hats are off to the entrepreneurs who are the path-breakers in this industry,” said Levitt, a prominent economist who co-wrote the immensely popular book “Freakonomics.” “I think they’re great people, and the innovation is phenomenal. It’s a fantastic example of what makes America great.”
Levitt – who will keynote the upcoming Marijuana Business Conference and Expo in Chicago – sees the recreational cannabis industry and general legalization as a grand experiment that will offer up lessons on everything from business management and consumer behavior to larger societal issues.
He spoke with Marijuana Business Daily (which also produces the conference) about his views of the cannabis industry, how dispensary and retail store owners can increase customer loyalty, and what it will take for a company in the marijuana space to develop a household brand.
Are economists taking this roughly $3 billion industry seriously, or is it a fringe topic that still elicits giggles?
The funny thing about economists is that they don’t actually take any industry seriously. Economics is such an abstract discipline, and academic economists are always 5-10 years behind.
I’ve seen almost no attention by academic economist to this new industry from a purely commerce perspective, but also from the view of what might emerge when you go from something that was illegal to legal. It’s a fascinating issue for an economist, though. It doesn’t matter if it’s $3 billion or $10 billion in revenues, it’s really about the behavioral implications of when you make something that was illegal into something that is legal, and how consumers respond.
You have supported the idea of legalization in the past. How did you think it would play out?
I’ve called for at least 15 years for decriminalization of marijuana. My hope was that it would happen on a state by state basis, and you’d have different models and different timing, which would allow us to learn about the costs and benefits of legalization or decriminalization.
That’s pretty much what happened, though it’s gone well beyond decriminalization. Can we identify some benefits and costs at this point, or is it too early?
The three benefits of legalization that jump out in my mind are the pleasure that’s associated with the consumption of marijuana by consumers, the potential reduction in crime and violence associated with legalization, and the reduction in criminal justice costs, which include not only enforcement costs such as police and prisons but also the unpleasantness associated with the punishment.
The only costs that are easy to identify are if the use of marijuana by me hurts someone else, or possibly if the use of marijuana hurts me and I’m too shortsighted or dimwitted to recognize that. The sidewalks aren’t crowded with masses of addicted marijuana users. I think there is very little evidence that any harms have come of this, and I think that was predictable.
It’s clear that there is tremendous demand for it, so I think it’s been a really simple case of letting the markets work, and with not even a hint of apocalyptic trends.
Is there anything about the evolution of the cannabis industry that you didn’t expect?
One of the most surprising things I’ve ever seen as an economist is when dispensaries in California years ago were begging the state government to tax them.
In general, businesses spend an enormous amount of time trying not to be regulated and taxed by the government. The interesting thing with dispensaries is that they absolutely and brilliantly understood that once you start taxing, the government becomes addicted to the money.
It’s a good example of how smart and sophisticated the businesses are in this industry.
You’ve spoken about how to capture more customers from competitors. What advice can you give on this end to a dispensary or retail cannabis store owner?
One thing I’m a huge proponent of is experimentation. Marijuana legalization is one form of experiment, and at the individual retail owner level it’s particularly true.
Business owners can and should carry out their own experimentation. How can a shop owner know exactly what customers want and exactly what prices to charge, for instance? What kind of advertising is most effective? Many of most successful companies in the world, the Googles and Amazons and even much smaller ones, can benefit from the experimental mindset of trying different things and seeing what works.
It’s an incredibly simple idea that for whatever reason is not very prominent in business. Marijuana is a great setting for this because the industry is so new that we don’t know the right or wrong way to do things.
Is there a bigger benefit for companies that experiment?
The folks who figure this out have the potential to expand in an unlimited way. In the long run there should be enormous franchised outlets for marijuana, and somebody will emerge as the McDonalds or Pep Boys of marijuana.
The person who does it will not succeed because they are smarter than the next guy, but because he or she figures out the formulas. And the way to figure that out is through experimentation.
You’ve had some podcasts and blog entries on the subject of marijuana, one of which compared various aspects of alcohol to cannabis. Any parallels between the two?
My view is that if alcohol just showed up on the scene today, we wouldn’t be very forgiving about the cost it imposes on society. Somehow marijuana got a bad draw from a social perspective, because there’s not much evidence that it’s harmful but it has been demonized for such a long time and lumped with things likely to be quite harmful.
Legalization (at the state level) has happened with nary a negative associated with it. If we went the opposite direction and alcohol was illegal everywhere, but then we began to introduce it, the number of drunk driving deaths would be so striking that there would be national headlines about whether we should’ve legalized.
We just wrote a story about the lack of minorities in the industry, which is particularly troubling because of the high incarceration rate of blacks in particular for marijuana possession. Any thoughts on this?
A great deal of distributors in the black market have been minorities, but I see no reason to think that the same individuals who thrive in the black market in general will thrive in a legal market. When the prohibition of alcohol went away, it wasn’t Capone and gangsters distributing, it was Bud and Miller.
So it’s surprising more minorities are not involved in the business side, but I’m not surprised in general that people who were successful in the black market are not involved in the legal market. It’s a different set of skills.
Chris Walsh can be reached at email@example.com