That this verdict was pronounced by someone like Posner, who is associated with the free-market law and economics movement, gave moral support to all the politicians who were intent on exploiting the recession (as they exploit all crises) to increase government control of the economy.

But what exactly is this “capitalism” that is blamed?

The word “capitalism” is used in two contradictory ways. Sometimes it’s used to mean the free market, or laissez faire. Other times it’s used to mean today’s government-guided economy. Logically, “capitalism” can’t be both things. Either markets are free or government controls them. We can’t have it both ways.

The truth is that we don’t have a free market—government regulation and management are pervasive—so it’s misleading to say that “capitalism” caused today’s problems. The free market is innocent.

But it’s fair to say that crony capitalism created the economic mess.

What is crony capitalism? It’s the economic system in which the marketplace is substantially shaped by a cozy relationship among government, big business, and big labor. Under crony capitalism, government bestows a variety of privileges that are simply unattainable in the free market, including import restrictions, bailouts, subsidies, and loan guarantees.

Crony capitalism is as old as the republic itself and we don’t have to look far to see how crony-dominated American capitalism is today. The politically connected tire and steel industries get government relief from a “surge” of imports from China. (Who cares if American consumers want to pay less for Chinese steel and tires?) Crony capitalism, better known as government bailouts, saved General Motors and Chrysler from extinction, with Barack Obama cronies the United Auto Workers getting preferential treatment over other creditors and generous stock holdings (especially outrageous, considering that the union helped bankrupt the companies in the first place with fat pensions and wasteful work rules). Banks and insurance companies (like AIG) are bailed out because they are deemed too big to fail. Favored farmers get crop subsidies.

If free-market capitalism is a private profit-and-loss system, crony capitalism is a private-profit and public-loss system. Companies keep their profits when they succeed but use government to stick the taxpayer with the losses when they fail. Nice work if you can get it.

It’s time we acknowledged the difference between the free market, which is based on freedom and competition, and crony capitalism, which is based on privilege. Adam Smith knew the difference—and chose the free market.

What’s taking us so long?

Judge Posner cites the new war on terrorism as the looming practical reason for ending the drug war. He points out that so-called “drug crimes” are victimless. Any threats posed by terrorists intent on slaughtering innocent people are immeasurably more serious than are whatever threats might be posed by people voluntarily purchasing, selling, and ingesting narcotics. And because expanded efforts to guard against terrorism require resources that have until now been used for other purposes, a sensible way to achieve the necessary reallocation of resources is to stop trying to protect people from themselves so that we can better protect people from violence initiated by others.

I cheered when I read Posner’s call to end the drug war. While I oppose drug prohibition principally on ethical grounds–I believe that each adult owns himself and ought to be free to do with himself as he pleases–I agree that practical exigencies, rather than moral-based reasoning, provide the best hope of ending the drug war. Maybe . . . perhaps . . . just possibly the intensified necessity that Americans have for wiping out terrorism will cause us to understand that continuing the drug war is too costly.

But I doubt it.

Apart from its immorality, the war on drugs has been too costly from its inception. This “war” has long consumed billions upon billions of dollars’ worth of resources, all spent with no discernable positive impact. Indeed, the only clear impact of the drug war has been a repulsive trampling of freedoms. Asset forfeitures, government espionage on its own citizens, and racial profiling are just the most blatant attacks on our freedoms unleashed by the war on drugs.

If the need to make sensible tradeoffs really drives voters and politicians, the drug war would have ended ages ago.

Astute readers might reply “No! Alcohol prohibition ended after just 13 years when Americans realized that it was failing.”

That’s the popular belief. It’s wrong.

National alcohol prohibition in the United States began on January 16, 1920, following ratification of the Eighteenth Amendment and enactment of the Volstead Act. Speakeasies and gangster violence became familiar during the 1920s. And yet Americans kept drinking. But contrary to modern belief, the 1920s witnessed little sympathy for ending prohibition. Neither citizens in general nor politicians concluded from the obvious failure of prohibition that it should end. As historian Norman Clark reports,

Before 1930 few people called for outright repeal of the [Eighteenth] amendment. No amendment had ever been repealed, and it was clear that few Americans were moved to political action yet by the partial successes or failures of the Eighteenth. . . . The repeal movement, which since the early 1920s had been a sullen and hopeless expression of minority discontent, astounded even its most dedicated supporters when it suddenly gained political momentum.

What happened in 1930 that suddenly gave the repeal movement political muscle? The answer is the Great Depression and the ravages it inflicted on federal income-tax revenues.

Prior to the creation in 1913 of the national income tax, about a third of Uncle Sam’s annual revenue came from liquor taxes. Not so after 1913. Especially after the income tax surprised politicians during World War I with its incredible ability to rake in tax revenue, the importance of liquor taxation fell precipitously.

By 1920, the income tax supplied two-thirds of Uncle Sam’s revenues, and nine times more revenue than was then supplied by liquor taxes and customs duties combined. In research we conducted, Adam Pritchard and I found that bulging income-tax revenues made it possible for Congress finally to give in to the decades-old movement for alcohol prohibition. Before the income tax, Congress effectively ignored such calls because to prohibit alcohol sales then would have hit Congress hard in the place it guards most jealously: its purse. But once a new and much more intoxicating source of revenue was discovered, the cost to politicians of pandering to the puritans and other anti-liquor lobbies dramatically fell. Prohibition was launched.

Despite pleas throughout the 1920s by H.L. Mencken and a handful of other sensible people to end the folly of prohibition, Congress gave no hint that it would reconsider its effort to ban alcohol sales. Prohibition appeared to be here to stay–until income-tax revenues nose-dived in the early 1930s. From 1930 to 1931, income-tax revenues fell by 15 percent. In 1932 they fell another 37 percent, so that in 1932 income-tax revenues were 46 percent lower than just two years earlier. And by 1933 they were fully 60 percent lower than in 1930. With no end of the Depression in sight, Washington got anxious for a substitute source of revenue.

That source was liquor sales. Jouett Shouse, president of the Association Against the Prohibition Amendment, was a powerful figure in the Democratic party that had just nominated Franklin Roosevelt as its candidate for the White House. Shouse emphasized that ending prohibition would boost government revenue. And a House leader of Congress’s successful attempt to propose the prohibition-ending 21st Amendment said in 1934 that “if we [anti-prohibitionists] had not had the opportunity of using that argument, that repeal meant needed revenue for our Government, we would not have had repeal for at least ten years.”

There’s no doubt that widespread understanding of prohibition’s futility and of its ugly, unintended side-effects made it easier for Congress to repeal the Eighteenth Amendment. But these public sentiments were insufficient, by themselves, to end the war on alcohol. Ending it required a gargantuan revenue shock to the U.S. Treasury.

So while I applaud Judge Posner and all others who advocate ending the drug war–and while I fervently hope that their calls succeed–if the history of alcohol prohibition is a guide, drug prohibition will not end merely because there are many good, sound, and sensible reasons to end it. Instead, it will end only if and when Congress gets desperate for another revenue source.

That’s part of the sorry logic of politics and prohibition.

Law and economics, or the economic analysis of law, is a relatively new discipline. It was launched in the late 1950s and early 1960s and has grown in importance and in the number of its practitioners ever since. It uses key principles of economics—such as self-interest, rationality, efficiency, and externalities—to predict the intended and unintended effects of different legal rules and to explain why we have the particular legal rules we do and why some legal rules might be considered better than others. Aaron Director and Ronald Coase, to whom the book is dedicated, and Judge Richard Posner, to whom the author refers in several chapters, have been major contributors to the field.

David Friedman is an economist and a professor of law at the University of Santa Clara School of Law. This book is one of his best efforts. His style makes it great fun to read, and it is filled with intriguing insights. Because of its comprehensive scope, it could easily be used as a text in an introductory course in law and economics. For example, it includes a chapter on antitrust law that I wish Joel Klein and Judge Thomas Penfield Jackson had read before they proceeded to punish Microsoft for being too effective a competitor.

Friedman’s early chapters explain basic economic concepts vital to understanding law. A transition chapter explains the structure of the American legal system, and the later chapters apply economics to the analysis of such things as criminal law, tort law, contract law, and marriage, sex, and babies. One especially interesting chapter is devoted to a law-and-economics analysis of three alternative legal systems—saga-period Iceland, eighteenth-century England, and Shasta County, California.

Law’s Order is more than an introductory text, however. For example, in Chapter 5 Friedman goes far beyond the usual exposition of the Coase Theorem. He illuminates the differences between property rights and liability rights and how the choice of efficient rules depends on such things as the free-rider problem among joint buyers and holdouts among joint sellers. A reader is well advised to read this chapter carefully, with pencil and paper at hand since it is basic to much that comes later.

Friedman introduces each new concept with an actual or hypothetical example that puts the reader in the center of the issue. Frequently, he comes to what seems a reasonable conclusion and in the very next paragraph he explains why it is wrong. In one case, the issue of whether, on efficiency grounds, we need criminal law at all, he goes through seven rounds of arguments changing his answer each time. He offers this “as evidence of how risky it is to go from the existence of an argument for the efficiency of some particular rule to the conclusion that the rule is in fact efficient.” It is also an effective expository device because it engages the reader. I tried to anticipate the arguments in each round before I read them. I was often wrong, but I learned something useful every time.

Judge Posner is famous for his conjecture that the common law, which develops over time through judicial precedents and decisions, consists of legal rules that are, for the most part, economically efficient. Friedman gives many examples—for example, the negligence doctrine in torts—consistent with Posner’s conjecture, but he also gives a few—such as product liability rules—that aren’t. Posner’s great contribution, according to Friedman, has been to direct attention to the question of economic efficiency in the law. “We do not know whether the law is efficient. We do know that the question ‘What is the efficient legal rule?’ converts the study of law from a body of disparate doctrines into a single unified problem.”

The book is filled with elegant, instructive arguments. Consider just one. Burglary, Friedman argues, should be a tort rather than a crime, and denting a fender should be a crime rather than a tort. The basis of those startling assertions is the incentive for potential victims to undertake efficient preventative measures. In tort law, successful plaintiffs are made whole through compensatory damages. In criminal law, victims do not receive compensation. If the penalty is a fine, it is the state that receives the money, not the victim. If the penalty is imprisonment, the victim suffers an additional loss in taxes to pay for the incarceration. Therefore, potential victims of crimes are more likely to undertake efficient prevention measures than are potential victims of torts. Preventative measures are more effective for dented fenders than burglaries. Under the general rule that incentives should be placed where they do the most good, denting a fender should be a crime, and burglary a tort.

Finally, the book has no footnotes and very few references. Friedman and his publisher have set up a Web site for his readers to obtain the missing information online. Friedman chose this option to make the book more user-friendly for the intelligent layman who will read it for general information and entertainment rather than as an academic resource. Icons in the margins of the hard copy point to corresponding online icons. I think this bit of entrepreneurship will pay off and thus become widely imitated.

Charles Baird, a professor of economics and the director of the Smith Center for Private Enterprise Studies at California State University at Haywood, is a quarterly columnist for Ideas on Liberty.