Economic AnalysisPraxeology25 October 2026

When Everything Is Illegal, Nothing Feels Criminal

Australia’s illicit tobacco boom, the Austrian school of economics, and the unintended consequences of government intervention.

Australia is currently conducting one of the most extraordinary experiments in economic intervention of the modern era. And remarkably, the results are almost exactly what economists warned us to expect.

Over decades, successive Australian governments have imposed increasingly punitive taxes and restrictions on tobacco, ostensibly to discourage consumption and improve public health. The result has been a flourishing illicit tobacco industry, billions of dollars in lost tax revenue, and criminal syndicates fighting violent territorial wars over the right to supply a product that ordinary Australians have been purchasing legally for generations.

The remarkable part is not that the government has struggled to contain the illicit market.

It is that the government helped create the very economic incentives that made the illicit market so profitable in the first place.

Australia's illicit tobacco boom is not simply occurring in spite of government intervention. It is occurring, in significant part, because of it.

And the explanation lies in principles understood by the Austrian school of economics for well over a century.

The market doesn't care what Parliament thinks

Consider the economics from the perspective of an ordinary Australian smoker.

According to the Australian Parliamentary Budget Office's September 2026 modelling, a typical smoker consuming approximately thirteen cigarettes per day would spend around $10,892 annually purchasing legal cigarettes.

The equivalent consumption of illicit cigarettes would cost approximately $3,277.

That is a difference of $7,615 per year.

For an ordinary Australian household, this represents an extraordinary financial incentive to change purchasing behaviour.

The government may regard that price differential as a useful mechanism for discouraging tobacco consumption. The consumer, however, is not obliged to interpret it that way.

The consumer simply sees two products offering substantially the same immediate utility, at radically different prices.

Some will quit smoking. Some will reduce consumption. Others will seek cheaper substitutes. And some will turn to the illicit market.

None of these responses requires a political philosophy, a rebellious disposition, or even much understanding of economics.

They require only the ordinary human tendency to pursue a preferred outcome while minimising the cost of achieving it.

And therein lies the fundamental problem with attempting to centrally manage human behaviour through economic incentives.

Government can legislate the price of a product. It cannot legislate the value that individuals place upon it.

When the imposed price diverges sufficiently from the price that can be offered through alternative supply channels, those alternatives become increasingly attractive.

The market responds.

The extraordinary scale of the response

In June 2026, the Australian Bureau of Statistics published experimental estimates of illicit tobacco and nicotine consumption using wastewater analysis alongside other economic data.

The findings were remarkable.

Between 2017 and 2025, the quantity of nicotine consumed in Australia increased by almost 40%, while the population grew by approximately 14%.

During roughly the same period, legal tobacco prices had almost tripled from their December 2016 levels.

And by 2025, the ABS estimated that approximately 80% of nicotine consumption came from sources outside the legal tobacco market.

That final figure warrants some caution. The estimates are experimental, and their scope includes a wider range of nicotine products than conventional tobacco-market statistics. The Illicit Tobacco and E-cigarette Commissioner separately estimated that illicit tobacco represented 50–60% of the tobacco market in 2024–25.

Nevertheless, the overall direction is unmistakable. An enormous proportion of the market has moved beyond the government's conventional regulatory and taxation systems.

The effects are equally visible in the Commonwealth's finances.

Between the 2023–24 and 2026–27 federal budgets, projected tobacco excise receipts for 2026–27 were revised down from $14.7 billion to just $3.6 billion.

An $11.1 billion downward revision in anticipated annual revenue.

To be clear, a budget forecast revision is not the same thing as a realised tax loss. But it demonstrates just how dramatically the government's expectations of its own revenue base have deteriorated.

This is a spectacular illustration of the difference between taxing economic activity and actually collecting the tax.

Government can establish an excise rate through legislation. It cannot simply assume that the underlying taxable activity will continue unchanged.

And when the underlying activity migrates into an illicit market, the government loses far more than revenue.

It begins losing visibility.

Mises, Hayek, and the consequences of intervention

The Austrian economists Ludwig von Mises and Friedrich Hayek developed powerful explanations for why attempts to centrally direct economic activity so often produce unintended results.

For Mises, the foundation was praxeology, the study of purposeful human action.

Individuals act according to their own preferences, circumstances and subjective assessments of value.

Government intervention does not suspend this behaviour. It merely changes the circumstances within which people make decisions.

A tax changes prices. A prohibition changes risk. A regulation changes the cost of participation.

But the individual remains an economic actor, continually reassessing the available alternatives.

Mises also identified a recurring problem with interventionism: when one intervention produces undesirable consequences, governments frequently attempt to correct those consequences through additional interventions.

The resulting distortions then become the justification for still further government involvement.

Hayek approached the problem from another direction.

In his influential 1945 essay The Use of Knowledge in Society, he explained how economic coordination depends upon information dispersed among millions of individuals, information that no central authority can fully possess.

Prices communicate information about scarcity, demand and opportunity. Entrepreneurs respond to those signals. Resources and commercial activity adjust accordingly.

The resulting economic order does not require a central architect.

Australia's illicit tobacco market demonstrates these principles in a particularly revealing way.

As the price of legal tobacco rises, consumers seek alternatives. Suppliers recognise the opportunity. Distribution networks develop. Retail channels emerge. Competition, sometimes accompanied by coercion and violence, develops around the resulting commercial opportunities.

No central economic planner designed this outcome.

Indeed, the central planners are actively trying to prevent it.

Yet the underlying market incentives remain powerful enough to sustain it.

The important distinction is that this does not make the illicit tobacco industry an example of an ideal free market. Criminal violence and intimidation are plainly incompatible with peaceful voluntary exchange.

Rather, it demonstrates that market forces continue operating even when the legal framework suppresses the ordinary institutions through which markets function.

The government has not abolished the economic incentive.

It has changed who is best positioned to profit from it.

When everything becomes criminal, being a criminal begins to mean nothing

There is a deeper consequence here, extending beyond taxation and commerce.

Every functioning legal system depends, to a considerable extent, upon voluntary compliance.

Most people obey most laws without requiring constant surveillance or enforcement. The system works because there is a broad degree of alignment between the law, prevailing social norms, and the behaviour individuals regard as reasonable.

But what happens when that alignment begins to disappear?

Consider the smoker purchasing illicit tobacco.

This individual may otherwise pay their taxes, obey traffic laws, respect private property, and conduct themselves as a perfectly ordinary member of society.

Yet they may regard circumventing tobacco excise as an entirely reasonable purchasing decision.

Their moral character has not necessarily changed.

Their assessment of the legitimacy of a particular law may have changed instead.

Of course, the precise legal consequences of purchasing or possessing illicit tobacco vary by jurisdiction and circumstance. Not every purchaser automatically commits a criminal offence.

But the broader social mechanism remains.

When participation in unlawful commerce becomes sufficiently commonplace, illegality itself can lose some of its capacity to generate social disapproval.

The state can criminalise a transaction. It cannot legislate society's moral judgment of that transaction.

This is a distinction that governments ignore at their peril.

Legal authority and social legitimacy are not interchangeable.

A parliament can create a criminal offence through legislation. It cannot guarantee that the wider population will regard the prohibited conduct as morally reprehensible.

Nor can it assume that citizens will continue to distinguish between the legitimacy of laws they voluntarily respect and laws they routinely circumvent.

The ultimate danger is not that every person purchasing illicit tobacco suddenly becomes a hardened criminal.

It is that the routine circumvention of law becomes an accepted feature of ordinary economic life.

And history provides an extraordinary precedent.

America's Prohibition: the experiment society already conducted

In January 1920, the United States began its experiment with nationwide alcohol prohibition.

Through the Eighteenth Amendment and the Volstead Act, the federal government prohibited the manufacture, sale and transportation of intoxicating liquor.

The intention was straightforward: reduce alcohol consumption and the associated social harms.

And initially, consumption did fall substantially.

Research published by economists Jeffrey Miron and Jeffrey Zwiebel in 1991 estimated that alcohol consumption initially declined to approximately 30% of its pre-Prohibition level.

But Americans did not simply abandon their preferences.

Over subsequent years, consumption recovered to approximately 60–70% of its pre-Prohibition level, despite the continued restrictions.

Meanwhile, an enormous illicit industry developed to satisfy the remaining demand.

Bootleggers produced and transported alcohol. Speakeasies sold it. Criminal syndicates developed increasingly sophisticated commercial operations to supply it.

The government had removed lawful channels of commercial competition while leaving substantial consumer demand intact.

The opportunity was irresistible.

Organised crime figures such as Al Capone became enormously wealthy not because they invented America's desire for alcohol, but because prohibition created a lucrative opportunity to satisfy that desire outside the law.

And the social consequences extended beyond the illicit trade itself.

The United States Federal Judicial Center documents how Prohibition overwhelmed federal courts, encouraged official corruption, strained law enforcement resources and contributed to violent organised crime.

Perhaps most significantly, it also generated widespread disrespect for the law.

Millions of otherwise ordinary Americans became participants in an economy that the government had attempted to outlaw.

It would be inaccurate to suggest that every American who consumed alcohol was thereby committing a federal crime. The central prohibitions concerned production, transportation and sale.

But that distinction only strengthens the economic argument.

Ordinary demand was sufficient to support an enormous illegal supply industry.

By 1933, the political and social costs of Prohibition had become sufficiently apparent that the United States repealed the Eighteenth Amendment.

The lesson was not that alcohol was harmless, nor that regulation could never reduce consumption.

It was that suppressing legitimate commerce could create extraordinary opportunities for illegitimate suppliers.

A century later, Australia is rediscovering much the same mechanism through its tobacco market.

The policies are not identical. Australia has not prohibited tobacco consumption, and tobacco excise has historically formed part of a broader public health strategy.

But the central economic relationship is strikingly familiar.

Prohibition does not eliminate demand by decree.

It changes the economics of satisfying that demand.

From legitimate commerce to organised crime

This brings us to perhaps the most extraordinary unintended consequence of Australia's tobacco policies.

The government has created an environment in which the financial rewards available to illicit suppliers can be enormous.

But unlike legitimate businesses, criminal enterprises cannot always rely upon enforceable commercial contracts, ordinary legal protections or peaceful dispute resolution.

In a lawful competitive market, businesses generally compete through some combination of price, quality, convenience and service.

In a criminal market, those mechanisms may still exist, but intimidation and violence can become additional tools of competition.

The Australian Criminal Intelligence Commission reported that conflicts involving illicit tobacco and vaping markets had contributed to more than 200 firebombings and at least three homicides since 2023.

Legitimate businesses have faced threats, extortion and violent attacks as criminal syndicates compete for market control.

One of the great ironies of the entire situation is that a policy designed partly to protect the public from the harms associated with tobacco has contributed to an economic environment in which people with no connection to tobacco consumption have suffered violence.

That does not mean tobacco taxation alone caused every criminal act.

The perpetrators remain responsible for their conduct, and the organisation of illicit markets involves many factors beyond excise rates.

But the profitability of these enterprises is inseparable from the enormous price differential between legal and illicit supply.

The intervention helped establish the opportunity.

Criminal organisations responded to it.

And the consequences have extended well beyond the original public health objective.

When the solution becomes the problem

Faced with the expansion of the illicit tobacco market, governments have responded through stronger enforcement, additional powers and greater interagency coordination.

In August 2026, the Commonwealth's Combatting Illicit Tobacco Act 2026 received royal assent.

Among its measures were increased penalties for illicit tobacco offences and expanded access to telecommunications interception powers for relevant investigations.

From a law enforcement perspective, the rationale is understandable. Criminal syndicates engaged in intimidation, arson and organised smuggling pose real threats to the community.

But from an economic perspective, the pattern deserves examination.

Government intervention helps create an enormous price incentive for illicit commerce.

The market responds by developing alternative supply channels.

Criminal organisations move into those channels, attracted by the available profits.

The resulting violence and lost tax revenue then provide the justification for more intervention.

The original policy contributes to a problem that subsequently becomes the rationale for expanding the state's regulatory and enforcement powers.

This is precisely the kind of self-reinforcing interventionist process that Mises warned about.

Of course, the situation is not entirely one-sided.

Australia's long-term reduction in smoking prevalence is real. The Australian Institute of Health and Welfare reports that daily smoking among people aged fourteen and over declined from 19.5% in 2001 to 5.6% in 2025.

Those are important public health outcomes. They should not be dismissed.

Nor should nicotine consumption figures derived from wastewater be confused with the proportion of people who smoke daily. These measures capture different dimensions of behaviour.

The relevant question is not whether every tobacco control measure has failed.

It is whether the increasingly punitive approach to taxation has reached a point where its additional unintended costs are becoming disproportionate to its marginal public health benefits.

That is an empirical question, requiring consideration of changes in consumption, addiction, health outcomes, enforcement expenditure, criminal activity and tax revenue.

But it is a question that cannot be answered merely by restating the original policy objective.

Intentions are not outcomes.

And the existence of an undesirable outcome does not, by itself, establish that further intervention will improve it.

The market moves beyond the government's field of vision

There is one final irony worth considering.

The Australian Bureau of Statistics acknowledges that illicit tobacco activity is not included in Australia's official national accounts, principally because of difficulties measuring it.

In other words, as economic activity migrates into illicit markets, a growing share of that activity becomes less visible in the statistics through which governments attempt to understand the economy.

The economic transactions have not necessarily disappeared.

People are still purchasing products. Suppliers are still earning revenue. Workers are still participating in distribution networks. Capital is still being deployed.

But the activity has migrated into channels that are harder to observe, regulate and tax.

And the more activity becomes concealed, the more difficult it becomes for government to evaluate the consequences of its own policies.

This is the Hayekian knowledge problem in unusually concrete form.

The central authority attempts to direct economic behaviour, only to find that the behaviour adapts faster than the authority can reliably observe it.

The government may know exactly how much excise it intends to collect.

What it cannot know with comparable certainty is how millions of individuals will alter their behaviour in response.

Nor can it fully anticipate the entrepreneurs, substitute products and distribution networks that will emerge to accommodate those decisions.

The market possesses no single mind.

It has millions.

The lesson governments refuse to learn

Australia's illicit tobacco boom is not evidence that tobacco is harmless, that taxation never changes behaviour, or that all regulation is futile.

It is evidence of something more fundamental.

Economic intervention changes the incentives facing individuals. Those individuals respond to the new incentives according to their own preferences, circumstances and available alternatives.

The resulting behaviour may diverge dramatically from what policymakers intended.

Sometimes the consequences are merely inefficient.

Sometimes they erode the tax base.

Sometimes they undermine respect for the law.

And sometimes they create profitable opportunities for violent criminal enterprises.

The crucial error is to assume that the consequences of an intervention can be understood independently of the intervention itself.

American Prohibition did not produce bootlegging despite its restrictions on alcohol.

Those restrictions helped make bootlegging commercially attractive.

Australia's illicit tobacco industry has not expanded despite the extraordinary price differential imposed upon legal tobacco.

That differential is one of the principal economic forces sustaining its expansion.

The effect exists, in substantial part, because of the cause. Not in spite of it.

And perhaps the most important lesson is that governments do not operate outside the laws of economics.

They are participants within them.

Their taxes change prices. Their regulations change costs. Their prohibitions change risks. Their enforcement changes the relative attractiveness of different forms of economic activity.

But individuals remain individuals, independently weighing costs, benefits and alternatives.

The government can prohibit a market from operating legally.

It cannot assume that the market will therefore cease to exist.

And when ordinary citizens come to regard circumventing the law as an entirely ordinary economic decision, the consequences extend far beyond the value of the lost tax revenue.

A government can afford to lose a tax. It can ill afford to lose the social legitimacy upon which voluntary compliance with all its laws ultimately depends.