Suddenly people were calling for significant cuts in government spending in the face of a rapidly growing national debt.

As often happens, calls for cuts in government spending were met by competing calls for higher taxes, especially on higher-income earners and businesses. They can afford to pay the extra taxes, we were told. And what’s more, higher taxes could actually help the economy.

In making this case, proponents of raising taxes pointed to the tax increases that came out of Washington under President Clinton in 1993. The U.S. economy, as measured by GDP growth, was strong in the years after those tax hikes while unemployment and inflation were relatively low. The argument now is that the 1993 tax increases did not inhibit the economic boom the country enjoyed in the last six or seven years of the twentieth century.

In April New York Times columnist Nicholas Kristof made this very argument. He wrote that while it’s true higher taxes in general “tend to reduce incentives,” this apparently “weak effect” is often overwhelmed by other factors. “Were Americans really lazier in the 1950s, when marginal tax rates peaked at more than 90 percent?” Kristof asked. “Are people in high-tax states like Massachusetts more lackadaisical than folks in a state like Florida that has no personal income tax at all?”

Like other observers, Kristof also contrasted the “golden period of high growth” after the Clinton tax hike with the “anemic economy” that followed George W. Bush’s tax cuts.

But do higher taxes really spur (or at least not inhibit) prosperity? Looking at the data from the 1990s, one might believe so. After all, the 1993 tax hikes were followed by years of strong economic performance. Post hoc ergo propter hoc (after this, therefore because of this), many might believe.

But not everyone agrees the data are quite so clear. The Heritage Foundation’s J. D. Foster, for example, believes the data show that the U.S. economy was already expanding when the Clinton tax increases took effect. If anything, he believes, those tax hikes slowed overall growth for several years until 1997, when the Republican-led Congress passed a series of tax cuts, including a reduction in the capital gains tax rate from 28 to 20 percent.

The “real acceleration in the economy began in 1997, when economic growth should have cooled,” Foster wrote. “This acceleration in growth coincided with a powerful pro-growth tax cut.”

Foster also authored a 2008 Heritage Foundation summary of several scholarly studies showing tax hikes corresponding with slower or negative economic growth. In theory higher taxes could encourage greater levels of private investment through lower borrowing costs—if government used the money to retire debt and reduced its competition for lendable funds. But this potential “silver lining” is overshadowed by the negative effects of higher taxes, he stated. However plausible theoretically, in practice the argument runs into trouble, not least from the fact that governments seldom save any of their revenue, Foster notes.

Still, the idea that the 1993 tax increases spurred economic growth will not die easily. For instance, some people argue that those tax hikes provided much needed confidence in the U.S. economy. As Kristof put it: “Tax increases can also send a message of prudence that stimulates economic growth.”

With this much disagreement it’s hard to know what is really the truth. And this is always the case when looking at the effects of any single economic policy in a vast and complex system. Indeed, so much is happening at any given time in a modern economy—central-bank policy, trade policy, military spending, technological innovation, war or peace, and more—it’s impossible to draw hard and fast conclusions from macroeconomic data alone.

The Austrian economist Ludwig von Mises made this point in his classic treatise, Human Action, in 1949. In discussing the role of historical data in economics, he wrote: “The champions of logically incompatible theories claim the same events as the proof that their point of view has been tested by experience. The truth is that the experience of a complex phenomenon—and there is no other experience in the realm of human action—can always be interpreted on the ground of various antithetic theories. . . . History cannot teach us any general rule, principle, or law.”

Stepping back, therefore, it may be worthwhile to consider fairly uncontroversial economic propositions, such as the law of demand or the law of marginal utility, when trying to determine the likely effects of a tax increase.

Basically, taxes alter relative prices. A tax on gasoline makes gasoline more expensive. A tax on whiskey makes whiskey more expensive. By the same token, a tax on income affects the “price” of leisure; that is, an income tax reduces the reward or “price” one receives for forgoing leisure in order to work. If you are willing to work for $10 an hour, you’re essentially “selling” your leisure time for that price. You might not be willing to sell that leisure time for a lower price. Thus an income tax can be expected, on the margin, to reduce the willingness of some people to work.

While all this is important, it’s probably more important to consider what happens to taxes after the government collects them. How government officials spend tax revenue can damage the economy as much as the tax itself can. That’s because taxes are used for any number of things that distort markets and waste resources, such as providing subsidies to favored industries or strengthening bureaucracies.

As a newspaper reporter I have frequent opportunities to witness government decisions to spend taxpayer dollars. Often an argument in favor of a particular spending program is that it will only add a few dollars to any single individual’s tax burden. Once a government program is in place, however, it’s extremely difficult to reverse it because government spending benefits particular individuals and they are quite motivated to maintain it. When budget cuts are proposed, government officials have effective ways of fighting back. For example, a proposed cut in education spending is nearly always said to be taking teachers out of classrooms, and a proposed cut in police spending is nearly always said to be taking neighborhood cops off the streets. The “fat” in education and law-enforcement spending may be elsewhere. But those are the items placed on the public chopping block by clever bureaucrats and politicians.

So the real problem with taxes and tax increases may be that they simply feed the beast—the political and less-efficient government sector—while shrinking the voluntary, more-efficient private sector. For anyone concerned about liberty this is reason enough to oppose higher taxes.

They each own and operate popular vending stands outside Turner Field in Atlanta, serving baseball fans with tasty snacks, fully licensed Braves merchandise, parody shirts, and other goodies at steep discounts. They pay all the required and varied taxes on sales and business to city and state officials.

Little did they know that in July 2011 they would find themselves at the center of a major effort to vindicate the rights of street vendors nationwide.

Street vending has long allowed entrepreneurs to provide for themselves and their families while satisfying customer demands and creating jobs. Together Miller and Hambrick employ about a dozen people. They see vending not merely as work but as a way of life. As Miller puts it: “I’ve been able to develop a lifestyle around vending. I’ve been able to purchase me a home and raise children and grandchildren.”

Hambrick takes pride that his business provides jobs, supports his entire family, and pays for his children’s education: “I employ six people, and they are depending on me, and I’m depending on them now. I’ve been able to put my kids through college working here and being successful.”

But a new law on the books in Atlanta is about to destroy both of these businesses, along with untold others throughout the city.

Unprecedented Monopoly

Vending is thousands of years old and has thrived in America since the 1600s.

By 2007 street-vending businesses throughout the country generated revenues in excess of $40 billion. Vendors in Atlanta alone brought nearly $250 million to their local economy.

The recession in 2008 tightened consumer wallets and forced many out of work, which led to a street-vending boom. And, sure enough, new regulations followed.

In 2009 Atlanta officials decided to create a citywide vending monopoly. The city signed off on a deal that hands over all vending on public property to a single multibillion-dollar corporation.

Atlanta Mayor Shirley Franklin signed an exclusive 20-year contract with a Chicago-based shopping-mall management company, General Growth Properties (GGP). While governments have long meddled with street vendors, this was the first time in American history that a city gave one company the “exclusive right to occupy and use all public property vending sites . . . including without limitation those vending sites currently occupied by public property vendors.”

The GGP contract calls for the construction of vending kiosks around Atlanta. As the kiosks are built the existing vendors are forced to move out or else start paying up to $20,000 annually in rent and fees to work out of a cramped GGP kiosk. Vendors used to paying $250 a year for their vending site must now hand over $500 to $1,600 every month for the privilege of working for the monopoly. This makes it all but impossible for most Atlanta vendors to stay in business.

This is not the first time Atlanta legislation has had the effect of destroying vending businesses. When Atlanta hosted the Olympics in 1996 then-mayor Bill Campbell gave a personal associate the right to sublease out vending spots throughout the city. Thousands of vendors were pushed away, and many lost their businesses and life savings.

The GGP kiosks now popping up in Atlanta are designed for advertising rather than selling merchandise. They are covered with ads on three sides, limiting visibility and function while making it difficult to attract and interact with customers.

Further, the new Atlanta law absurdly requires GGP to prohibit their vendors from competing with nearby bricks-and-mortar businesses. The contract stipulates that GGP lessees may only sell products that “complement and not compete with existing ‘bricks-and-mortar’ retailers in the areas of the vending units.”

The transition to kiosks is occurring in several phases. As soon as the first phase went up numerous vendors were forced into unemployment. The second phase includes the area around Turner Field, with construction scheduled to begin toward the end of this baseball season. Once phase two is implemented, Miller’s and Hambrick’s businesses will almost assuredly be destroyed.

On July 15 Miller came to work to find a spray-painted outline of a kiosk on the ground next to his vending location. At a press conference two weeks later he pointed to the outline and lamented, “That might as well be my coffin.”

Trouble in Texas

Unfortunately, Atlanta vendors are not alone. Consider Yvonne Castenada.

Castenada is a proud Texan. Born and raised in El Paso, she created a successful vending business that provides for her daughter and injured husband. Castenada is a food vendor. By 5 o’clock in the morning she is already up and getting her food ready for the day. She cooks her popular burritos in a nearby commercial kitchen, loads them into warming trays in her food truck, and sets out into the El Paso streets to serve her customers.

Her business was thriving until city officials passed a law that turned El Paso into a no-vending zone—for the sole purpose of protecting bricks-and-mortar restaurants from competition.

The protectionist regulations made it illegal for mobile food vendors like Castenada to operate within a thousand feet of any restaurant, convenience store, or grocer. The city even prohibited vendors from parking to await customers, forcing vendors instead to constantly drive around the city until a customer flagged them down. Once the customer was served, the vendors had to leave immediately.

Vendors caught violating the new law faced thousands of dollars in fines.

City officials harassed and cited Castenada on multiple occasions. She said, “It has gotten to the point where I’m concerned about being able to pay my bills. I find myself constantly looking over my shoulder just because I might be too close to a restaurant.”

A spokesperson for the El Paso Restaurant Association admitted in an interview by the local ABC affiliate that the law is purely protectionist: “We wanted this ordinance in place to help established restaurants keep their business.”

Even the city’s health inspector admitted before the El Paso city council that the law was put in place “to address concerns of the fixed food establishment. . . . [T]here’s not a health reason or a Texas food rule that I can find that justifies that.”

A National Problem, A Nationwide Initiative

In November 2010 The Economist wrote that “thanks to Twitter and the tough economy, some of the best food Americans eat may come from a food truck.” Predicting that the recessionary street-vending boom would lead to “the biggest shift in America’s culinary landscape in 2011,” the magazine noted that new regulations were popping up in several cities, and in others there was pressure to ease restrictions so vending could flourish.

A new national report released by the Institute for Justice (IJ), Streets of Dreams, evaluated the vending regulations in the 50 biggest cities in the United States. The results were disturbing. For instance:

• 33 cities have established no-vending zones, which often include potentially lucrative areas such as downtown or areas near sporting venues.

• 20 cities ban vendors from setting up near bricks-and-mortar businesses that sell the same or similar goods.

• 19 cities prohibit mobile vendors from staying in one spot, forcing them to spend much of their day moving instead of selling.

• 5 cities prevent mobile vendors from stopping and parking unless flagged by a customer.

In January IJ launched its National Street Vending Initiative, creating a nationwide litigation and activism effort aimed at vindicating the right of street vendors to earn an honest living. The first targets were El Paso and Atlanta.

“I’m fighting for my American Dream.”

Thankfully, Castenada refused to let her competitors and their friends in government run her out of El Paso. Instead, in January she teamed up with other vendors and the Institute for Justice in a major federal lawsuit against the city. They argued that the vending regulations were anticompetitive and unconstitutional on the grounds that they violated the economic liberty of El Paso vendors.

And just weeks after the suit was filed, the city backed down and repealed its protectionist regulations.

Miller and Hambrick joined the vending initiative in July. Together with IJ they announced a lawsuit challenging Atlanta’s vending monopoly. The Wall Street Journal editorialized that “the Atlanta case is one more example of the way that governments tend to collude with private interests to benefit the powerful. We hope Atlanta’s new law is tossed out in court, so vendors like Messrs. Miller and Hambrick can get back to business.”

Hambrick clarified why he brought the lawsuit: “I’m fighting for my American Dream. And I’m fighting for the rights of other vendors and small businesses.”

Indeed, a victory by Miller and Hambrick could have national implications. A ruling in their favor would set a precedent for future challenges to restrictive vending laws in cities across the country.

Momentum is building. On August 17 vendors in Chicago joined forces with area law students and the IJ Clinic on Entrepreneurship in a grassroots street-vending campaign. The city has recently taken to ticketing and even arresting vendors simply for serving their customers. Regulations currently prohibit vendors from working within 200 feet of bricks-and-mortar restaurants. It’s also illegal for vendors to put toppings on a hot dog from their cart or serve any food before 10 a.m. The grassroots campaign seeks to overturn these needlessly restrictive regulations.

Judicial Engagement

Importantly, such vending laws exist throughout the country today because the courts fail to protect economic liberty. In the name of “judicial deference” judges have largely abdicated their responsibility to protect this right and enforce limits on government power. Without meaningful judicial supervision, laws favoring special interests have proliferated to an almost unimaginable extent.

For instance, IJ challenged a blatantly protectionist law in Louisiana that made it illegal to arrange and sell flowers without first obtaining permission from the government—the only law of its kind in the country. Aspiring florists were forced to pass a subjective licensing exam . . . that was graded by existing florists! Remarkably, a court upheld the law on the grounds that it was theoretically possible that without a flower cartel the public could be harmed by “infected dirt.”

Unless judges are engaged—taking our rights and the facts before them seriously—such abuses are inevitable. For vendors and other Americans to fully enjoy their right to earn a living, the courts must decide that protectionism is not a constitutional exercise of government power. Currently the federal circuit courts are split on this issue.

For their part, Miller and Hambrick are ready to fight all the way to the Supreme Court if that’s what it takes to vindicate the right to earn a living for entrepreneurs nationwide.

What was true for an Englishman was true also for a citizen of the United States. There were unfortunately many in both countries who thought that freedom was not enough. They believed that in addition to liberty, people had also the right to a large measure of protection from the struggles and uncertainties of human existence. In America the crusade for a government large and powerful enough to offer such protection was led by the so-called Progressives. One of them, Walter Lippmann (1889–1974), later observed that the older faith was that human rulers’ limited moral and intellectual capacities could not safely be trusted with unlimited power. The Progressives believed, by contrast, that there were no limitations on man’s ability to rule others and therefore no need to limit the powers of government. They had renounced the wisdom of the ages, he said, in order to embrace errors that the ages had renounced.

That’s what Lippmann believed in 1937, when he was America’s most popular journalist. His “Today and Tomorrow” column was in 155 daily papers and would soon be in 200. At the height of his popularity he would have over 10 million readers, many of whom, it has been said, did not know how they should think about the issues of the day until they had read his comments. A lady in a New Yorker cartoon told a friend, “A cup of coffee and Walter Lippmann are all I need.”

His credentials as a libertarian were less than impeccable. As a student at Harvard he developed a fondness for the British Fabians, who believed they could overcome the prejudices and inefficiencies of popular democracy with a small core of selfless leaders. In 1914 he published Drift and Mastery, in which Frederick W. Taylor’s principles of scientific management were used to draw up a blueprint for the rational arrangement of society. (Editor’s note: See “Taylorism, Progressivism, and Rule by Experts,” by Kevin A. Carson, The Freeman, September 2011.)

Applying this blueprint, he said, would lead to an America in which the role of private entrepreneurs would be taken over by salaried bosses, government commissioners, and labor leaders. His Public Opinion appeared in 1922 and quickly became the subject of college courses, articles in scholarly journals, master’s theses, and even a few dissertations; it was described by John Dewey as “the most effective indictment of democracy as currently conceived ever penned.”

Lippmann spent most of his life, both before 1937 and afterward, writing things of which someone like Dewey would approve. His conversion to free-market principles was brief and fleeting. Still, it was sincere for as long as it lasted. It seems to have begun with his frustration over the blundering statism of Herbert Hoover. News of the stock market crash was still in the headlines when the President began a series of conferences in which he told industrial leaders that they must promise not to reduce wages. His Agricultural Marketing Act gave farmers a half-billion dollars in 1929 and another hundred million early in 1930. In 1931 he offered a nine-point program of government intervention, which broadened the range of those eligible for assistance of this kind.

As things grew worse Hoover justified himself with words remarkably similar to those of another troubled administration 80 years later: “We might have done nothing. That would have been utter ruin.” Instead of allowing things to take their course, he said, his administration had devised American history’s greatest program of economic defense. He blamed the problem on investors, criticized their interest in profit, and was amazed to see stock market prices continuing to fall.

Lippmann’s patience with all of this sagged rapidly and finally snapped when Hoover put his name to the Tariff Act of 1930 (aka the Smoot-Hawley Tariff), which raised the rate on some 20,000 imported goods to record levels. Hoover signed this despite the more than one thousand economists who endorsed a petition urging a veto. He could not, he said, go back on party pledges: “Platform promises must not be empty gestures.” The words were for Lippmann simply Hoover’s confession that his policies, far from being intended for the general good, were actually an appeal to special-interest groups.

Although he would later become what someone has described as “one of the Roosevelt administration’s most important journalistic assets,” he had no initial enthusiasm for Hoover’s replacement. Franklin Roosevelt, he said, was “a pleasant man without any important qualifications for the office, who would very much like to be president.” The New Deal, he observed, was little more than an extension of policies begun under Hoover, and it was in every way as much of an appeal to special interests. The Agricultural Adjustment Act, for example, helped large landowners at the expense of sharecroppers and agricultural laborers. Lippmann later attacked Roosevelt’s plan to pack the Supreme Court and found himself assailed by the left-wing press as a reactionary.

For the first (and only) time in his life he was excluded from the inner circle of “the intellectual elite.” Upset and a little angry, he sat down to apply his wide reading and literary talents to a defense of ideas he had once opposed and a reconsideration of ideas he had once espoused. The result, The Good Society, was for the most part a brilliant examination of the intellectual, logical, and moral impossibilities of economic planning.

Social Planning: The Intellectual Impossibility

The intellectual problems with social planning are illustrated by Colbert’s troubles in managing the economy of Bourbon France. The regulations for the textile industry, to take one case, filled four volumes of 2,200 pages and three supplementary volumes. It was discovered in 1718 that planners had in spite of this neglected to include the number of threads appropriate for use in the cloth of Langogne, “a matter which must be attended to without fail.” The information for attending to it could be obtained only by means of reference to existing procedures, which was available only from established manufacturers, who were thus empowered to use the law for preventing innovative competitors from introducing new methods.

This points to the dark truth behind every “plan” for “improving society.” Governments, Lippmann said, are made up of people who meet to make speeches and write resolutions, of people who study papers, listen to complaints, and shuffle paperwork. These people suffer from indigestion, asthma, boredom, and headaches, and all of them would rather be making love than passing laws. They know whatever they have happened to learn, are aware of what they have happened to observe, and are interested in whatever has happened to catch their imagination. A power-holder may sometimes have high ideals, but he is in the end no more than a human being, “a little man in trousers, slightly jagged,” as William Vaughan Moody put it.

Such a person cannot possibly know enough to devise wide-ranging schemes for society as a whole. No matter what the source of their authority human rulers are human beings, and as such have only a severely limited understanding of the world in which they find themselves. The social planner sits down to a breakfast that is the final link in a chain stretching far beyond his comprehension. Society goes on as it does because of processes that are habitual and unconscious, and it is only because people can take so much for granted that they have the time to attend to anything. Anyone who attempts to plan everything is immediately trapped in a web of details. “The real, rather than the apparent, policy of any state will be determined by the limited competence of finite beings dealing with unlimited and infinite circumstances,” Lippmann wrote.

In his efforts to manage this complexity every ruler must imitate Colbert in calling on the expertise of those whose industry he hopes to regulate. In attempting to plan the production of cloth in eighteenth-century France the government got its advice from existing manufacturers and passed decrees that would protect them from competition. This led to laws against the production of printed calicoes, which then were all the rage. Attempting to regulate health care in early twenty-first-century America, the Obama administration accepted the advice (and contributions) of the American Hospital Association and the Federation of American Hospitals. These represent the interests of large community hospitals, whose dominance is threatened by the emergence of smaller hospitals offering superior service in particular physician groups’ areas of expertise. With its provisions against the creation of any additional doctor-financed hospitals, the Patient Protection and Affordable Care Act might have been better named the Large Hospital and Inferior Service Protection Act.

Earlier in his life Lippmann had endorsed a policy of gradual collectivism. He had never admitted to being a socialist, but he had argued that the government should gradually assume control of the economy, if not through outright ownership, then at least by means of detailed regulations. There should be a survey of all the available resources, and then national authorities should put together a plan for developing them. By the time he wrote The Good Society he had come to realize that such a plan would be flawed from the outset. The planners’ limited information must necessarily put them under the influence of such organized interests. “In practice,” he wrote, “gradual collectivism is not an ordered scheme of social reconstruction. It is the polity of pressure groups.”

Though they demand different things, these pressure groups agree in asserting that their interest is identical to the national interest. Those who believe the national interest is best served by means of cheap steel for the automobile industry, however, and those who believe it is best served by fixed and protected prices for the sake of the steel manufacturers, cannot both be right. Every new regulation, Lippmann said, is a decision in favor of some interest and against others.

Those who believe they have been harmed will react by seeking to protect their interests as well as they can. New laws lead to new violations, and these in turn to more new laws. In early eighteenth-century France lawsuits over methods for the production of cloth were endless. Observing that smuggling and bootlegging had become standard business practices Colbert decided to put the power of the State behind his decrees. An estimated 16,000 people were killed in his war on printed calicoes. A much larger number were punished somewhat less severely, though still with great cruelty. On one occasion 77 were hanged, 58 were broken on the wheel, 631 were sentenced to the galleys, one was set free, and none were pardoned. One assumes the Obama administration’s attempts to regulate health care will be less violent.

Social Planning: The Logical Impossibility

During the twelfth century there were 19 stations at which merchants travelling along the Rhine had to stop and pay a toll. Twenty-five more stations sprang up during the thirteenth century and 20 more during the fourteenth, all backed by the firepower of fortresses built for the purpose. Many of these were in the Duchy of Cleves, where they were referred to as the “treasure.” They were a treasure, though, only to the people involved in collecting the tolls. They added nothing to the peace or prosperity of Europe. They were merely a means for the forcible transfer of wealth. That, Lippmann said, is the real meaning of “economic planning.” The government does not produce anything. All it does is take from one group and give to another.

Even as he wrote, the policy of handing out money to appease the farm lobby, first planted by Hoover, was blossoming under Roosevelt. At the beginning of the twenty-first century’s second decade it has spread even beyond our shores. The Department of Agriculture gives American cotton planters about $3 billion a year. These handouts encourage overproduction, lower world cotton prices, and ruin small farmers in many Third World countries. In 2005 the World Trade Organization upheld a Brazilian challenge to these subsidies, but the United States ignored the ruling. When Brazil was granted the right to impose punitive tariffs and lift patent protections on a wide range of U.S. nonfarm products, Congress responded with a proposal to offer over $147 million a year to Brazilian farmers. Rather than eliminate a ruinous and unjust policy, our representatives wanted to expand the list of those who could make claims on it. In terms of Lippmann’s illustration, they decided that instead of abolishing the toll stations and tearing down the castles, they would “turn every cottage into a castle with a toll station of its own.”

The problem with such policies lies in the fact that the owners of these toll stations are the beneficiaries of a government-backed guarantee that they will receive additional income in exchange for reduced effort. Each is promised that his share of the national wealth will increase even though his contribution to that wealth has declined and perhaps even if he makes no contribution at all. This works for each of the stations for as long as there are only a few of them. Unfortunately they multiply. The granting of special treatment in one case is soon followed by the demand for similar grants to others, as in the case of the Brazilian farmers. There cannot in the end be more for everyone if everyone has been granted the privilege of producing less. Soon everyone, perhaps even the average toll station owner, is poorer than he would otherwise have been.

Social Planning: The Moral Impossibility

Specific economic contradictions may be eliminated by changing specific policies. Deeper and more difficult to eliminate is the effect of such policies on the character of the people. It is evident in the case of the cotton subsidy that it is gigantically helpful to the fewer than 20,000 planters who benefit from it. Nonbeneficiaries see this and come to the conclusion that the government has a magical power to create wealth. They forget about the iron chain that binds prosperity to production. They forget that wealth is the result of thought, effort, innovation, and thrift, and are gradually convinced that the path to abundance lies in the power of the State. They once understood that they could advance themselves only by increasing their service. They now believe that they must do it by imposing their will on those around them.

The greater the extent to which this idea is accepted, the more intense the struggle for power becomes. It goes on and must go on because the members of contending factions have been tempted to ignore the logic of their own beliefs. If power allows them to disregard other people’s preferences, their own preferences may be similarly disregarded by some third faction that has more power than they do. If they think about it, they will begin to see that their own liberty is ultimately dependent on their willingness to allow others similar freedom. In Lippmann’s terms, each man’s right to freedom from arbitrary treatment at the hands of his neighbor has an “inescapable corollary . . . the duty of man not to deal arbitrarily with others.”

Lippmann said he had been brought up to believe there was no such thing as a self-evident truth, but this seems to be one. It is also the most ancient axiom of morality. “What you do not want done to yourself,” Confucius told his followers, “do not do unto others.” Mohammed said, “Not one of you truly believes until you wish for others what you wish for yourself.” A Buddhist text says, “Treat not others in ways that you yourself would find hurtful.” The same truth appears even more tellingly in the Upanishads, in the teaching of Hillel, and of course in the words of Jesus: “Therefore all things whatsoever ye would that men should do for you, do ye even so unto them.”

Adam Smith’s notoriously self-interested butcher and baker understood this. They understood that they would have to close their shops if they did not succeed in delivering something their customers would like. The Golden Rule of morality is the golden rule of economics, and it works because it respects the free choices of everyone involved. Every economic plan that depends on the coercive power of the State, on the other hand, tends toward disaster because it is in the final analysis immoral. “Though it is momentarily triumphant,” Lippmann concluded, “it is a failure, and it must fail, because it rests upon a radically false conception of the economy, of law, of government, and of human nature.”

There is no question that the tax funding of public-sector unions creates important distinctions from those in the private sector. For one thing, private-sector unions negotiate in the context of limited money; if they demand too much the company cannot compete against rivals and union members could find themselves unemployed. By contrast public-sector unions have no similarly clear limit on available money and government has no competitor. Thus public-sector unions are among the loudest voices for increased taxation and big government to sustain their wages and benefits.

Reducing those wages and benefits has become a popular cause largely because private-sector workers (even within unions) make considerably less than the government employees whom they are heavily taxed to support. In December 2009 the U.S. Bureau of Labor Statistics reported that government employees at the state and local levels earned an average of $39.60 an hour (including benefits), while private workers earned $27.42—over 30 percent less. Moreover, according to the Bureau of Labor Statistics, private workers have a 20 percent chance of losing their jobs in any given year; public workers have a 6 percent chance.

Reducing the power of either form of union is far less popular than reducing public-sector costs for at least two reasons. First, all modern unions benefit from legal privileges such as collective bargaining and the government certification that bestows a virtual bargaining monopoly on specific unions. Second, such prerogatives are widely viewed as workers’ rights to be cherished in the same manner as constitutional rights. That’s why Jesse Jackson compares Wisconsin’s massive pro-union demonstrations to Martin Luther King’s 1965 march in Selma for the voting rights of blacks.

Is it accurate to equate collective bargaining with workers’ rights? Is it accurate to view public- and private-sector unions as distinct rather than fundamentally similar? The answers lie in history.

It is important to define unions precisely. In a free-market context a union is nothing more than a collective agency through which workers protect common interests and secure common advantages through negotiation or other forms of persuasion, such as boycotts or peaceful strikes. Individual workers assign their right to negotiate to the collective agency in much the same manner as they might assign power of attorney; no one is forced to join or to pay dues. Thus the union is a collective expression of the individual right to free association and to contract one’s own labor. Employers remain free to decline negotiation and hire replacement workers.

Many conservatives and libertarians would consider the foregoing definition of unions to be unrealistic. In his article “The Myth of the Voluntary Union,” economist Thomas DiLorenzo argues that those who believe unions can be voluntary fall into “an easy trap . . . detached from any reality and history.” He insists that “violence against competitors has always been an inherent feature of unionism, even apart from the ‘violence’ of State-imposed legislative privileges that unions enjoy” (emphasis added). DiLorenzo refers specifically to the legal power of collective bargaining and to a history of brutal strikes as proof of unionism’s inherent violence. Yet it is not clear that violence is inherent in unions.

Political Evolution

Could unions exist without legal privileges in a society in which employment relationships were not mandated, in which there were no restrictions on self-employment or home industry? Are free-market unions possible?

The current paradigm of a modern union is rooted in the presidency of Franklin Delano Roosevelt. It was created through New Deal legislation, especially the Wagner Act, which established the legal right of workers within an industry or company to unionize if a majority of them voted in favor of doing so. The result has been far from an expression of the free market. For example a modern union receives government certification in order to engage in collective bargaining. In other words, the government authorizes it as the sole representative of a set of workers and legally requires the employer to give the monopoly union a seat at the negotiating table. This monopoly shuts out other groups or dissenters from negotiating their own contracts on their own terms. In many cases individuals can choose not to join a specific union but nevertheless they remain bound by union contracts and are required to pay union “fees.” The modern union thus represents a forced transfer of authority from individual workers to a collective.

Government schools, which are operated by what is arguably America’s strongest union, teach that the New Deal transferred power from business to labor. And without question the modern form of union gained political clout. But the political transfer was far more complex than it is portrayed to be.

Wagner and Big Business

In his essay “Labor Struggle: A Free Market Model,” Kevin A. Carson argues that the Wagner Act was designed to centralize, bureaucratize, and tame the unions to the advantage of big business, which was already no stranger to privilege and subsidy. That is why some of the most vigorous advocates for modern unionism were leaders of industry, such as Gerard Swope, president of General Electric. By specifying who could negotiate terms and how strikes could occur, Wagner removed some of the most powerful tactics from the labor movement. Carson comments, “The primary purpose of Wagner, in making the conventional strike the normal method of settling labor disputes, was to create stability and predictability in the workplace in between strikes, and thereby secure management’s control of production” (emphasis in original).

Certification created labor monopolies that eliminated the need for business to negotiate contracts with multiple groups or individuals within the same company. Business also benefited from the unions’ acting as enforcement agents, policing their own memberships’ compliance with contracts. They prevented wildcat strikes and punished boycotts, work slowdowns, and other labor tactics that had proven both popular and effective in the past.

Leaders of modern unionism were aware of the benefits they offered to big business. In Ethics and American Unionism (1958), Sam Dolgoff wrote of John Lewis, president of the United Mine Workers of America (UMWA) from 1920 to 1960, “In 1937, Lewis assured the employers that ‘a CIO contract is adequate to protect against sit-downs, lie-downs, or any other kind of strike’. . . . [T]he corporations accepted . . . ‘industrial unionism’ because as a matter of policy, the mass-production industries prefer to bargain with a strong international union able to dominate its locals and keep them from disrupting production” (emphasis added).

Wagner and Grassroots Federations

Dolgoff outlined the impact of the Wagner Act on grassroots labor federations such as the UMWA. The National Federation of Mine Laborers had been the parent union of the UMWA, and by its constitution, “the Federation consisted of Lodges (Locals) and districts which vigilantly defended their independence from the domination of the National Office. Their insistence on autonomy and unity through federation (free agreement) was in keeping with the finest libertarian traditions of the American Labor Movement. . . . When Lewis became President in 1919 he did away with the federalist structure of the union, rooted out autonomy and self-determination of locals, centralized and took complete control of the union.” The Wagner Act completed the centralization.

Thus both Carson and Dolgoff argue convincingly that the modern union was an arrangement of shared advantage between big labor, big business, and big government. The relationship between business and unions was not necessarily cordial but it was often convenient.

Among those disadvantaged by the arrangement were smaller employers, the self-employed or non-unionized workers, and the broader grassroots labor movement itself.

Nineteenth-century America was the heyday of the grassroots labor movement. Fueled by a massive influx of immigrant workers and the rapid development of industry, a system of vigorous and varied labor organizations arose to address the specific needs of working people, which went far beyond a decent wage: Labor organizations often functioned as social and cultural support systems as well.

The most prominent nineteenth-century labor federation was the Knights of Labor. Established in 1869, membership reached 28,000 in 1880 and peaked at nearly 700,000 members in 1886. The primary demand of the Knights was an eight-hour day, but it also campaigned on such issues as ending convict and child labor. The Knights emphasized projects designed to empower its membership both economically and socially and to provide security for families. Through local chapters the Knights established worker-owned producer cooperatives; it launched public education campaigns to raise awareness of and sympathy for labor issues; and it organized social support networks to insure against the injury or ill health of members. Indeed many organizations or unions began as “benevolent associations” intended to care for the families of deceased or incapacitated members.

In “Revolutionary Tendencies in American Labor—Part 1,” Dolgoff explained that the labor movement “created a network of corporative institutions of all kinds: schools, summer camps for children and adults, homes for the aged, health and cultural centers, insurance plans, technical education, housing, credit associations, et cetera. All these and many other essential services were provided by the people themselves, long before the government monopolized social services wasting untold billions on a top-heavy bureaucratic parasitical apparatus; long before the labor movement was corrupted by ‘business’ unionism.”

Although the Knights of Labor used pressure tactics such as boycotts and the endorsement of friendly politicians, they did not generally emphasize strikes. Terence V. Powderly, who presided over the Knights during its ascendancy (1879–1893), openly opposed strikes, which he believed caused violence and increased conflict; he favored peaceful negotiation instead. Some local leaders within the Knights disagreed and flexed their autonomy by pursuing local strikes. Indeed, the internal conflict over strikes contributed to the Knights’ decline.

Labor organizations within the nineteenth-century libertarian movement adopted much the same approach as Powderly—namely the use of mutual support, persuasion, and education as tools of labor reform. Perhaps the most prominent of these organizations was the New England Labor Reform League (NELRL), established in Boston in 1869. Its membership boasted individualists Josiah Warren, William B. Greene, and Benjamin Tucker. Ezra Heywood’s The Word served as the NELRL’s publication. The foundational “Declaration of Sentiments” declared the League’s goals to be “Free contracts, free money, free markets, free transit, and free land—by discussion, petition, remonstrance, and the ballot, to establish these articles of faith as a common need, and a common right, we avail ourselves of the advantages of associate effort.”

One example of NELRL activity illustrates the broad manner in which the League defined labor activity. Along with his wife Angela, Heywood founded the Co-Operative Publishing Company from which pamphlets issued, including ones on birth control. The NELRL believed that women workers were victims of the poverty created by unplanned children; thus, birth control fell within the realm of labor reform. “Lady Agents” were sent out to tour the factories and other working-class haunts of New England. Once they had found an audience, the Lady Agents spoke on subjects that merged labor reform with family planning, all the while offering the Co-Operative pamphlets for sale.

With effective networks and diverse strategies, a broad grassroots labor movement grew in power; its threat to entrenched interests also grew. The threat came into glaring focus in 1877 and 1894 with two strikes that involved violence on both sides. The Great Railroad Strike of 1877 began in West Virginia over a cut in wages; lasting 45 days, it was finally put down by federal troops who went from city to city to quash sympathy strikes by industrial workers. The Pullman Strike of 1894 began in Pullman, Illinois, again over a cut in wages. Spreading nationwide, it also attracted wildcat sympathy strikes and ultimately involved about 250,000 workers in 27 states. Eventually President Grover Cleveland sent U.S. marshals and some 12,000 troops to break the strikes.

By the turn of the twentieth century the labor movement—notably, the Industrial Workers of the World (IWW, or Wobblies)—had also become a political threat to the status quo. Organized in 1905, the Wobblies had strong leaders but emphasized rank-and-file organization. Unlike the Knights of Labor, however, the IWW enthusiastically embraced strikes; indeed, it initially opposed the signing of all labor contracts specifically because they blunted the power to strike.

With a large immigrant membership and explicitly socialist principles, the IWW became a potent voice against America’s entry into World War I, which it viewed as a conflict in which the workers of one nation were fighting the workers of another for the profit of capitalists. Thus the IWW became a prime target of the Department of Justice. In September 1917, 48 IWW meeting halls were raided and 165 leaders were arrested under the new Espionage Act. The next year 101 of them went on trial. All were convicted and received prison sentences of up to 20 years. Government repression effectively destroyed the IWW.

Government and big business had learned a lesson: An uncontrolled labor movement was unpredictable, politically dangerous, and bad for commerce. This was particularly true in the early 1930s, when Roosevelt swept into power in the wake of the Great Depression.

In 1929 the stock market collapsed and people panicked, causing runs on banks and massive bank failures. Unemployment rose as high as 25 percent while the personal income of those still employed declined. Large cities were hard hit, especially those dependent on heavy industries. Rural areas were devastated as crop prices tumbled and a severe drought turned farmland into dust. Hundreds of thousands of people were driven from their homes in search of any work whatsoever. Still other people left because of bank foreclosures.

A massive and migrant army of unemployed is a formula for labor revolt. Thus Roosevelt offered a New Deal to American workers; it was a series of interlocking economic programs implemented between 1933 and 1936. Through them the federal government’s regulation of all aspects of commerce increased dramatically; its purpose was to create stability, especially in the area of labor.

This is the context into which the modern union, or big labor, was born—a governmental response to labor upheaval and a big-business desire for regulatory stability. The business elite may not have liked every aspect of New Deal labor policies, but it had long favored Roosevelt’s general approach to labor relations.

The clout of a voluntary union comes from the individual members who assign their rights of contract over to a representative of the collective. In modern unions the opposite happens. Some members may join freely but they cannot later negotiate for themselves if they disagree with the union. Other members may be required to join as a condition of working in a specific industry or at a unionized company. Thus the modern union is the opposite of a grassroots organization; it strips individual workers of the rights of free non-association and of contract. The modern union—whether of the public or private sector—is the antithesis of workers’ rights.

Once I happened to criticize high tax rates to a friend, a “liberal” with decidedly egalitarian beliefs. His reply was that he didn’t mind high taxes because, he said, “The public receives needed government services in return.” That is the sentiment politicians and interest group leaders know how to exploit. All they have to do is to cloak their programs in rhetoric about “the public good” and most opposition to their schemes will evaporate.

In his latest book Manhattan Institute scholar Steven Malanga explores the venal game of separating people from their money through conspiracies between politicians and special-interest groups. Taxpayers are systematically robbed by those conspiracies—Malanga uses precisely the right word—to fund a plethora of high-cost, low-benefit (sometimes no-benefit) government boondoggles like public education, urban renewal, safety from terrorists, mass transit, and alternative energy. Naturally the people and organizations that receive the cash invest some of it in propaganda (excuse me, “public relations”) and political campaigns to ensure that their money never stops flowing.

This plague is far worse in some states than others. Malanga devotes entire chapters to the fiscal wreckage done to California and New Jersey by public-sector unions. California has a prodigious budget deficit that is sure to increase due to the high salaries and lavish retirement benefits promised to government employees. Prison guards, for example, earn six-figure salaries owing to the political support their union gave to former governor Gray Davis and key legislators.

The union’s endorsement enabled them to posture as “tough on crime” when they really meant to be tough on taxpayers.

Teachers’ unions are virtuoso performers in the shakedown. They tirelessly promote the notion that more spending on education is a panacea that cures poverty, inequality, economic woes, environmental degradation, and so on. Anyone who dissents will be pilloried as “anti-education” in heavily funded attack ads. In New Jersey the government until recently was essentially a vassal of the New Jersey Education Association, squeezing more and more out of taxpayers. That rising tax burdens have long-term adverse economic effects apparently never occurs to the union leaders.

Or perhaps they simply don’t care. In any event New Jersey underscores just how steep a price we pay for having turned education, which should be a matter of choice and contract, into a coercive near-monopoly by government.

The most expensive shakedown ever has been our housing debacle, to which Malanga devotes an illuminating chapter. He begins with the forgotten history of governmental meddling in the housing market, which goes back to that early advocate of government economic intervention, Herbert Hoover. As Warren Harding’s secretary of commerce in 1922 Hoover launched the Own Your Own Home campaign, the beginning of a long series of futile, costly federal programs to encourage Americans to buy rather than rent their housing. Just as with education, housing is none of the government’s business, but the notion that rising ownership percentages show progress has become an article of faith with many politicians. From Hoover through Barack Obama, taxpayers have had to pick up the costs of mortgage defaults—mortgages that would never have been written but for the idiotic political mania. The huge tab for the lending binge by the two government mortgage giants, Fannie Mae and Freddie Mac, falls not on the politicians and advocacy groups that inflated the housing bubble, but on the suffering taxpayers.

What makes these and many other shakedowns possible (and arguably inevitable) is what Malanga calls “the culture of entitlement.” Rapidly eroding are the old virtues of thrift and self-reliance. They have been replaced by feelings that everyone is entitled to whatever he wants and the purpose of government is to ensure that it is provided. Thus there is nothing morally wrong in pushing the government to give you whatever you want. If others aren’t happy, they can play the political game, too. As long as the process of expropriation takes place under the cover of “democracy,” no one can complain.

Well, people should complain, and Shakedown will undoubtedly provide the fuel for the building rebellion against the conspiracy Malanga has ably exposed.

Few of us, however, think of Wall Street in a similar vein. Why, Wall Street consists of rich, Republican-leaning firms that make their money by financing business—right? Wall Street is interested in minimizing government because its business clients are harmed by the expansion of government—right?

Those notions could not be more mistaken, as veteran financial journalist Charles Gasparino demonstrates in his latest book, Bought and Paid For: The Unholy Alliance Between Barack Obama and Wall Street. Far from advocating a minimal, night-watchman State (or at least shrinking somewhat the bloated leviathan we now have), the big Wall Street firms earn such enormous profits from financing federal deficits that a shrinking State is the last thing they would ever want. On the contrary, expanding government that borrows heavily guarantees buckets of money in their coffers—far more than the big firms make from the difficult work of business finance.

If that isn’t enough of a shock to people who accept the conventional wisdom about politics, Gasparino has many others in store. Most people would assume that wealthy Wall Streeters would have been scared silly of a candidate like Barack Obama, what with his Progressive/radical/community-organizer past and redistributionist rhetoric. The truth is just the opposite. Obama was the candidate preferred by the top Wall Street CEOs, who regarded him as more amenable to their interests than Hillary Clinton and far more inclined to expand federal borrowing than any Republican in the 2008 field. It’s true that in 2009, as president, Obama gave Wall Street a tongue-lashing for its gigantic bonuses (bonuses made possible by Obama administration policies), but that was pure political theater, Gasparino argues. There was and still is a symbiotic relationship between Obama and Wall Street. Obama expects and will probably get the same high level of campaign support from it in 2012 that he received in 2008.

Among the many enlightening revelations in the book is that the Wall Streeters factored into their support for Obama his pledge to raise income taxes on the wealthy. They concluded that paying somewhat higher taxes would be greatly outweighed by their profit gains. Other Americans might feel the sting of higher taxes, but Wall Street knew that it would be way ahead even with higher rates.

Compared with the likes of Wall Street giants like Goldman Sachs, other American special-interest groups seem puny. The advantages of being a government pet deemed “too big to fail” are immense. “Goldman,” Gasparino writes, “more than any other firm, was able to use its status as a government-protected business to gain access to billions of dollars of borrowed money at rock-bottom rates and then use the funds to buy bonds—many of which were the same as those that had helped cause the financial crisis, but were now trading at just pennies on the dollar.” Gasparino acknowledges that the men who run the big Wall Street firms are brilliant, but unfortunately they employ their brilliance in manipulating Washington.

It’s not just Washington, though. Wall Street has also been earning great fees by helping states and localities borrow and spend beyond their means. Gasparino gives an illuminating history of the relationship between Merrill Lynch and supposedly prudent Orange County, California. Thanks to financial advice from a Wall Street consortium headed by Merrill, Orange County’s government went on a spending binge that seemed affordable. Unfortunately, the investments that initially performed so well and lulled people into a false sense of security later crashed, leaving the county facing huge deficits. But Merrill had made its money. The same is true regarding bankrupt Greece. Wall Street was happy to sell the Greek government advice on how to continue borrowing and hiding its looming fiscal crisis, as long as firms got their fees up front.

We often hear politicians and big-business leaders cooing about how they will work together to solve the nation’s problems. Gasparino says that idea is pure hokum. Teamwork between the federal government and Wall Street means “The big firms underwrite the massive amounts of debt being sold to keep the welfare state afloat, and the welfare state bails out the big firms from some of their most disastrous forays into risk.”

The huge cost of that partnership is paid for by the rest of America in higher taxes and a sluggish economy.

If this book doesn’t make you angry over our crony-capitalist economy, I can’t imagine what would.

In Last Call: The Rise and Fall of Prohibition, a brilliant and exhaustively researched book, David Okrent examines the forces behind the enactment and repeal of Prohibition as well as its consequences, both intended and unintended. From 1920 until 1933 most Americans were forced to choose between abstinence and illegal consumption. But Americans loved to drink: Per capita alcohol consumption in the nineteenth century was three times today’s rate. It’s no surprise that so many chose to continue their consumption illegally.

If the goal of Prohibition was to eliminate, or even reduce, many of the problems associated with alcohol consumption—such as criminal activity, binge drinking, drunk driving, and deaths and injuries via alcohol poisoning—it was an unambiguous failure. As Okrent illustrates, after 13 years of speakeasies, corrupt enforcement, and criminal empires, the repeal movement had little difficulty in convincing a beleaguered public that Prohibition was a mistake.

However, this is not to say that Prohibition was entirely ineffective. If the goal was to reduce overall consumption of alcohol by increasing its price, Prohibition worked largely as intended. Initial consumption declined to 30 percent of its pre-Prohibition level, though this number rose to 70 percent within three years and stayed roughly at that level by the time of repeal. However, even for its advocates this is an odd measure of success for prohibition. Also worth noting is that repeal did not bring about a significant increase in drinking. Per capita consumption rates did not reach their pre-Prohibition levels until 1973.

Enforcer Colonel Ira L. Reeves bitterly stated at the end of his term that the only thing he had accomplished was that he “had raised the price of alcoholic beverages and reduced the quality.” This was a declaration of frustration and defeat, an admission he had been unable to remove alcohol from the American way of life. In line with this assessment, one of the main lessons Okrent derives from Prohibition is that government cannot effectively legislate against people’s tastes.

Okrent primarily focuses on the battle between the “wet” and “dry” political movements dating from the mid-nineteenth century until the 21st Amendment and the repeal of Prohibition in 1933. Both sides had their share of notable and influential characters, perhaps none more so than the dry Wayne Wheeler, leader of the Anti-Saloon League (ASL). In the history of American politics, no interest group has been as influential as the ASL and few individuals have had as much direct impact on public policy as Wheeler. H. L Mencken, a dedicated wet, wrote of Wheeler: “In fifty years, the United States has seen no more adept political manipulator.”

Wheeler and the ASL, supported primarily by rural Protestant voters, had a stranglehold over Congress and most state legislatures during most of Prohibition. Okrent writes that the Wheeler-led ASL “effectively seized control of both the House and the Senate in the 1916 elections” and did not loosen its grip until the early 1930s.

Perhaps the most enlightening, and disturbing, revelation in the book is how the ASL became the most powerful pressure group the nation had ever known and how the dry movement was able to enforce its will on a population that loved to drink. Most people are familiar with Prohibition-era stories involving corrupt police and politicians taking bribes from bootleggers like Al Capone. What most people are unaware of, however, is just how openly most members of Congress manipulated the political process to push Prohibition on a largely unwilling public.

A primary reason Prohibition happened was that the dry rural voters in favor of it were vastly overrepresented in state legislatures and in Congress. To get an idea of just how overwhelming this discrepancy was, consider that by 1929 a staunchly wet congressional district in Detroit had a population of 1.3 million, while ten separate dry districts in the Missouri had fewer than 180,000 people total. This disparity was the work of dry legislators, who blocked reapportionment and thus denied accurate representation to wet districts that were experiencing unprecedented immigration. Okrent summarizes the significance of the situation aptly: “Never in American history, not even during the tumult of Civil War, had Congress disregarded the constitutional mandate, enunciated in Article 1, Section 2, to reapportion itself following completion of the decennial census. . . . Between 1921 and 1928, forty-two separate reapportionment bills were introduced in the House. Not one became law.”

Although political manipulation was vital to the dry movement, Prohibition would not have passed if not for the support of one of the broadest coalitions in American history. The diverse movement behind the Eighteenth Amendment and the Volstead Act included such groups as the Ku Klux Klan, the American Medical Association, the women’s suffrage movement, and the Industrial Workers of the World, to name a few. Although these groups were diametrically opposed on most issues, each saw potential advantages from Prohibition.

Baptists and Bootleggers and Doctors and Coke

Prohibition provides a clear illustration of one of the basic lessons of Public Choice economics: Interest groups use the political process to concentrate benefits on themselves while dispersing costs on others. The AMA, for example, foresaw the potential for a lucrative business providing prescriptions for alcohol under the Volstead Act for roughly $3 (or about $33 in 2010 dollars). Although in 1917 the AMA ruled that the use of alcohol in therapeutics “has no scientific value,” after two years of Prohibition the organization declared alcoholic beverages to be useful in the treatment of 27 separate conditions including diabetes, asthma, and old age. The AMA’s sudden change in medical advocacy was in line with its self-interest.

The AMA was not alone in this regard. Asa Chandler, the founder of the Coca-Cola Company, was an ardent supporter of Prohibition because he saw the potential to eliminate the competition provided by brewers and distillers. Chandler was rewarded for his vision: Coca-Cola saw sales triple. Charles Walgreen expanded his drug store chain from 20 to 525 stores during the 1920s. Although family historians have credited this expansion to the invention of the milkshake, the profitable trade in medicinal alcohol provides a more likely explanation.

Making Matters Worse

As important as it is to understand how Prohibition passed, it is even more important to understand why it made many alcohol-related problems worse. Prohibition failed in this sense because the policymakers behind it failed to predict how consumers, suppliers, and regulators would respond. Many people continued to drink, and a multitude of bootleggers, violent mobsters, and corrupt politicians were willing to provide a continuous supply.

As with most cases of failed social engineering, the people who advocated Prohibition suffered from a conceit that it would work exactly as intended. The economist Irving Fisher, known for his groundbreaking work on interest rates, claimed in 1919 that Prohibition would increase national output 10–20 percent every year. Although alcohol consumption remained high, Fisher continued to attribute the growth of the 1920s to Prohibition.

Per capita alcohol consumption returned to around 70 percent of its pre-Prohibition levels by 1923 because a multitude of entrepreneurs were willing to operate outside of the law to quench the public’s thirst. The infamous Purple Gang controlled the vast alcohol traffic flowing from Canada through Detroit, while New York mobsters like Charles “Lucky” Luciano launched their long criminal careers in the illicit alcohol trade. The notorious Chicago bootlegger and gangster Alphonse Capone said of his profession, “I give the public what the public wants. I never had to send out high pressure salesmen. Why, I could never meet the demand.”

This is not to say that Capone or his contemporaries were unfamiliar with the use of force. Since Prohibition drove the market for alcohol into the illegal sector, men like Capone had to rely on extralegal measures to enforce contracts and resolve disputes. Sometimes these measures included violence. To get an idea of just how much, consider the homicide rate. In the United States it went from less than 12 per hundred thousand people in 1920 to 16 by the end of Prohibition, then subsided to less than 10 by 1940.

Nonviolent Means

Not all bootleggers were violent, however. Men like Samuel Bronfman and William “Bill” McCoy specialized in the importation of alcohol through ports and border towns all over the country. Once these specialists had evaded or bribed Prohibition agents and local politicians to bring their products into the country, they would sell them to gangsters like Luciano who handled the massive distribution to local speakeasies. New York, for example, had roughly 32,000 speakeasies during the height of Prohibition.

Although some Prohibition agents could not be bought, the prevalence of corruption throughout the era was staggering. Okrent illustrates countless examples of rampant opportunism by Prohibition enforcers. Chicago Mayor Bill Thompson, for example, received more than a quarter of a million dollars directly from Capone’s organization for his 1927 campaign. Ranking police captains amassed bank accounts approaching hundreds of thousands of dollars on salaries ranging from $2,500 to $4,000 a year.

The bootleggers controlling the black market in alcohol were actually more likely to support dry politicians in favor of Prohibition than wet politicians favoring repeal. The logic behind this strategy is simple: Bootleggers and gangsters needed Prohibition to stay in business. If alcohol were legal they would quickly be replaced by legitimate companies. The ideal combination from the criminal perspective was dry policy and corrupt enforcement, and they spent whatever was necessary to make this happen.

To understand why criminals were willing to spend so much to ensure political cooperation and endure work-related hazards like gang warfare, it is necessary to know just how much was at stake. Annual sales of bootleg liquor were estimated at $3.6 billion in 1926, which is roughly $43.4 billion in 2010 dollars. This astounding sum was about the same as the federal budget that year.

Why Not More Violence?

Given the stakes, the real puzzle is why more violence did not occur. Events such as the St. Valentine’s Day Massacre, where Capone’s South Side Gang killed seven rival gangsters, garnered a lot of attention in the national press. The extended periods of peace, stability, and even cooperation that occurred both between and within different criminal enterprises, however, have generally gone unnoticed.

Seattle bootleggers convened in 1922 to set prices and, more important, to establish rules to minimize conflict. Similar meetings occurred in Philadelphia, New York, and other major cities throughout the 1920s. Despite the enormous amount of money at stake, most areas of the country where alcohol remained avoided outright gang warfare.

The fact that economic activity of the same magnitude as the U.S. government could be organized outside of the law is surprising for a number of reasons. Those who choose a life of crime tend to be violent, impatient, and untrustworthy by nature. Despite these obstacles, criminals often discover ways to cooperate on a large scale to capture illicit profits.

Besides the use of violence, how did a bunch of violent, impatient criminals manage such organizational stability? They employed reputation, costly signaling, and constitutions as means to enforce agreements and resolve disputes. Criminals worked hard to avoid conflict where possible because conflict is costly. Gangsters like Capone and Luciano were driven to cooperate with other criminals by the same economic forces underlying cooperation between their law-abiding counterparts.

It is important to understand the robustness of criminal organization for a number of reasons. For one, it explains to a large extent why Prohibition was doomed to failure. If there is a strong enough demand, legal prohibitions on certain goods and services will simply shift markets into the waiting arms of the illegal sector of the economy.

That criminals could engage in complex economic interactions outside of the law also illustrates some important lessons for the robustness of self-enforcing exchange in general. If criminals are capable of overcoming major obstacles to organization and exchange, then conventional arguments that the State is necessary for cooperation and exchange to occur must be reconsidered. Even in an environment of mistrust and violence, firms were formed, contracts were honored, and disputes were mostly settled peacefully. A better understanding of these processes can shed considerable light on the ability of individuals to cooperate and trade in the absence of a formal legal framework.

This is not to say that criminal organization is the pinnacle of achievement in a market economy. On the contrary, the experience of black markets brought about by Prohibition illustrates how inefficient they are relative to markets with well-defined and legally enforceable property rights. Overall quality diminished, while fraud, theft, and violence increased. Criminal cooperation also periodically broke down into outright gang warfare, though as noted, this was generally the exception to the rule. The important lesson, however, is that under Prohibition, criminal suppliers found a way to meet the public’s demand despite all the obstacles they faced.

Although Okrent avoids making any explicit comparison between the prohibition of alcohol and the ongoing prohibition of certain recreational drugs, there are a number of obvious similarities. Criminal organizations continue to provide a seemingly limitless supply of illegal drugs; quality is low, potency is high, and corruption and violence are endemic.

Some 28,000 people have died in the border war between drug cartels and United States and Mexican government agents since 2006. Street gangs continue to battle over territorial distribution rights. As Nobel Prize-winning economist Milton Friedman aptly said, “Al Capone epitomizes our earlier attempts at Prohibition; the Crips and Bloods epitomize this one.”

Examples of Legalization

As was the case with the prohibition of alcohol, advocates of the “war on drugs” often claim that decriminalization would result in a massive spike in drug use. Although it is impossible to know in advance exactly how much consumption would increase, the experience of Portugal could provide some clues.

Since the decriminalization of all drugs there in 2001, user rates have not increased and remain near the lowest in Europe. Sexually transmitted diseases and deaths due to drug usage have decreased significantly (see Glenn Greenwald, “Drug Decriminalization in Portugal: Lessons for Creating Fair and Successful Drug Policies,” Cato Institute, April 2, 2009).

Just as Coca-Cola and the AMA lobbied for alcohol prohibition because it was in their economic interest to do so, a number of groups have a vested interest in the war on drugs. One illustrative example is the California Beer and Beverage Distributors, which donated money to oppose last year’s unsuccessful ballot proposition to legalize marijuana in California. History rhymes in interesting but predictable ways. This behavior is consistent with the lessons of Public Choice. The distributors, like Asa Chandler of Coca-Cola 90 years earlier, see prohibition as a means to eliminate competition.

The unfortunate reality is that despite the diagnosis of failure for prohibitions past and present, policy-makers often prescribe a further dose of the same failed policies. In 1926 Wayne Wheeler said the “very fact that the law is difficult to enforce is the clearest proof of the need of its existence.”

D’Souza needs to get out more. Specifically he should have a talk with Timothy Carney and Charlie Gasparino, whose books demonstrate beyond question that the best phrase to sum up Obama’s presidency is not “African anticolonial socialist” but “American Progressive corporatist.” Carney’s 2009 book is titled Obamanomics: How Barack Obama Is Bankrupting You and Enriching His Wall Street Friends, Corporate Lobbyists, and Union Bosses (it was reviewed in the June 2010 Freeman). Gasparino’s recently published book is called Bought and Paid For: The Unholy Alliance Between Barack Obama and Wall Street. Neither writer could be mistaken for a left-winger.

The political establishment, helped by the mass media and intelligentsia, has long played a game in this country. It consists in depicting the competition for power as between two blocs: one hostile to business in the name of social justice, the other friendly to business in the name of “the free market.” Each bloc’s talking points and pet projects are calculated in superficial ways to reinforce its signature theme. Whenever the blocs need to rally their respective bases, they accentuate their surface differences. The “antibusiness” bloc accuses its opponents of being, say, Wall Street lackeys, while the “pro-free-enterprise” bloc accuses its opponents of being, say, socialists.

It’s all a sham that serves each side’s interests. The rivals actually want two variations of the same thing: the corporate state, a system of economic privilege that transfers wealth via government from market entrepreneurs, workers, and consumers to well-connected business interests.

What we have are two factions of a single establishment. Differences in rhetoric notwithstanding, both are friends of and beholden to big entrenched manufacturers (military contractors lead the way) and big financial institutions. Neither faction wishes to do anything to undermine the interests of these businesses. And for their part, the business people have no desire to antagonize either side. They need one another: The politicians need the campaign funds and economic cooperation; the businesses need the subsidies, guarantees, low interest rates, and impediments to competition. The banks in particular need friendly relations with politicians (federal, state, and local) who float debt that brings big fees for bond underwriters. It’s one close and lucrative alliance (which is not to say the various parties agree on every detail). Thus it has been throughout American history. (Doubters should consult Arthur A. Ekirch, Jr.’s classic, The Decline of American Liberalism.)

Obama to the Rescue

Enter Barack Obama. “For the most part, Obama had been good to the banks—really good. They’d gotten everything they wanted in terms of bailouts and handouts and reaped enormous profits because of it,” Gasparino writes. “. . . The fact of the matter is, when you strip away the name-calling and class warfare coming from the Obama administration, and when you ignore Wall Street’s gripes about the new financial reform legislation that will put a crimp in some of its profits, these two entities are far more aligned than meets the casual eye. They coexist to help each other—in an unholy alliance against the American taxpayer.”

Gasparino points out that Obama signaled his eagerness to be Wall Street’s friend at a meeting with the big players during his presidential campaign, and they came through with the money. Wall Street had no reason for remorse when they saw his economic appointments and advisers: Timothy Geithner (formerly of the New York Fed), Lawrence Summers (Treasury secretary under Bill Clinton and former World Bank president), Paul Volcker (former Fed chairman), Robert Rubin (formerly of Goldman Sachs, later of Citigroup), Ben Bernanke (reappointed as Fed chairman), Rahm Emanuel (formerly of Goldman Sachs), and Greg Craig (a political insider who has gone on to represent Goldman Sachs from one of the nation’s top law firms). Many other Wall Street insiders, whose names are not so well known, have the President’s ear.

Gasparino’s thesis is confirmed by the essential continuity between the Bush and Obama administrations. Wall Street got first consideration beginning when the rotten fruit of bipartisan housing and monetary policies became apparent. If anything, the Obama team has substantively treated Wall Street better than the Bush team did. The Fed has gone into the business of allocating capital selectively, buying up mortgage-based and other “assets” of dubious value from institutions deemed too big to fail. One must guard against being deceived by political rituals. The Dodd-Frank financial “reform” is portrayed as the long-overdue taming of Wall Street, but no one who pays close attention believes that. The usual players will help write the myriad rules the new law calls for, and they are not likely to harm the insiders’ interests.

Sure, Obama bashed Wall Street last fall. No surprise: There was a campaign on and his party was in deep trouble; unemployment was stuck above 9.5 percent; and the disillusioned base needed rallying or it might not have shown up at the polls. The bigwigs at Goldman and the other firms may not be happy about the rhetorical roughing-up. They may even be concerned that a desperate Obama will do something in the short run that could reduce the growth of profits and executive pay. Such uncertainty is surely one reason for the reluctance to invest and slow recovery. But it’s unlikely that any big player fears that the future holds a radical anti-capitalist revolution.

The daily talk-radio and cable-news alarms about this being the most radical left-wing administration in U.S. history should be chalked up to base-rallying on the other side. As I suggested at the outset, the American political system capitalizes on the division in public opinion over the role of government by propagating the myth that there is a grand war raging between the advocates of Big Government and the advocates of Free Markets. In fact, it’s an intramural competition between two rival factions that favor government management of the economy—with a few differences in detail—on behalf of special interests.

Why the charade? All the better to exploit the productive classes, those that would be prospering in a freed market.

This is a rather extreme statement. Are governments really so tightly bound by the beliefs of the public? Anyone versed in Public Choice theory is likely to find Mises’s statement a bit much. After all, Public Choice demonstrates how incentive structures in the political system can lead to policies that are not in fact favored by the majority of citizens but are in the interest of a powerful few.

Public Choice analysis is incredibly useful to economists and laypeople alike. It has opened our eyes to the difficulty of government reaching its own stated ends because of incentive problems within the system of government itself. It has dispelled the myth that government ineptitude is simply the result of bad leaders. However, in all this emphasis on incentives and interests, Public Choice often overlooks or minimizes the role of ideas.

We cannot forget the power of ideas to overcome the bad incentives inherent in any system of government and to act as a roadblock to the seemingly inevitable expansion of State power.

Consider a rather silly example that illustrates the inability of Public Choice alone to explain the world of policies in which we live.

A billboard says, “Kicking chickens creates prosperity.”

This is part of a campaign sponsored by the Partnership for a Chicken-Free America. The group is made up of people who have an extreme dislike for chickens, and they are willing to put vast resources into reducing the well-being of such fowl. In fact, they advocate legislation to establish national Kick-A-Chick Day.

Most voters and members of the general public do not share this distaste for chickens. Then, again, most people are relatively indifferent when it comes to chicken happiness. With a few exceptions, it is not in an individual’s interest to spend resources on a counter-campaign or to hire lobbyists to oppose the Kick-A-Chick bill; the costs of doing so simply outweigh the benefits.

This is a classic case of concentrated benefits and dispersed costs. The anti-chicken people derive tremendous happiness from harming chickens, making their campaign a worthwhile expenditure. Yet the general public gains little from preventing chicken kicking, and the cost of opposing it is very high.

On the other hand, the public loves prosperity. If they believed that punting hens created wealth, there is little reason to suspect they would not support the policy. A public-awareness campaign would be just the ticket.

Armed with Public Choice theory we can see the sad but likely result. The chicken-free association will exert its influence and get its bill. The public will either support what they believe to be a prosperity-creating policy or ignore it altogether because the cost of fighting is too high. The interests align in such a way that we can expect the anti-bird forces to get their way.

Of course this story is absurd and such a law would never be introduced, let alone pass. What makes it so obviously impossible?

Ideas.

People know there is no causal connection between kicking a chicken and enjoying a higher standard of living. That knowledge makes the campaign laughable. Regardless of how the interests are aligned, if people are educated enough to know that chicken kicking does not equal prosperity, such an absurd policy will not be enacted.

Ideas and Public Opinion

This was an admittedly silly example. You could claim that the real reason such a stupid policy wouldn’t fly is not public opinion, but the fact that no real interest group would advocate for kicking chickens. But it is not hard to imagine other instances where a real interest would benefit from marketing a false cause-and-effect relationship, but where they simply cannot because the public knows enough not to buy it. Hotdog producers would gain if the consumption of one frankfurter per day were required by government. Why don’t they promote such a law? They could run ads saying, “If you eat a hotdog, a child will be cured of cancer.” It is not hard to see that, real or imagined, interest groups cannot get away with everything, even in the face of bad incentives.

Yesterday I saw a sign on the side of a bus that I found no less absurd than the chicken-kickers campaign. It read, “Converting buses creates jobs. What are we waiting for?” The ad was sponsored by a “clean air” association, no doubt consisting of members of the natural-gas industry and people for whom a reduction in fossil fuel use would bring some great personal pleasure.

Just like our chicken story, the incentives are aligned so that the benefits of bus-conversion mandates to the members of this small group exceed the cost of their advocacy efforts, while the benefits to individual citizens of stopping the mandates fall short of the cost of opposition. As far as incentives go, the situation seems pretty dire.

Unlike our chicken story, however, most people do not know there is no magical or “free” job creation when government mandates bus conversions. The resources used to convert the buses must be taken from somewhere, and it is as likely as not that there are many other jobs destroyed or never created in the first place when the resources are redirected. Furthermore, most people do not know that there is no causal connection between more jobs and more prosperity, or a higher standard of living. In fact, if a government mandate creates jobs, it is likely that it does so precisely because it is destroying wealth by moving it from more-productive to less-productive (and more labor intensive) uses.

This lack of knowledge is actually good news.

It means things are not as hopeless as pure Public Choice theory might suggest. Bad incentives can be overcome by good ideas. In our chicken story it was clear that interests alone were insufficient to enact policy. Knowledge of the policy’s incoherence trumped the incentive structure. With a grasp of basic economics, people may find the sign on the bus just as laughable as the idea of Kick-A-Chick Day.

Special interests can only appeal to things within the realm of accepted public opinion, which is shaped by public knowledge. We can affect public knowledge.

Special interests can do much to destroy liberty given the incentive structure in our political system. Indeed, with an ignorant populace there is little they cannot do. But even the most powerful interests ultimately answer to the ideas held by a majority of citizens. Policy follows the path blazed by belief.

In emphasizing the role of ideas in limiting the expansion of the State or the power of special interests I do not mean to say Public Choice is incorrect. It is a valuable toolkit that brings a dose of realism to our efforts at reforming the State. But it is most powerful when it recognizes and incorporates the power of ideas to change and shape interests, and to help people put aside their short-term interests and understand their long-term interests.

It was recognition of the power of ideas over interests that motivated Leonard Read to start the Foundation for Economic Education. It is because of the power of ideas that FEE has tirelessly educated individuals on economic principles for these many years. It is because of the power of ideas that we must continue our educational efforts, no matter how frustrating it may sometimes be.

When we succeed, all interventionist interest groups and their ploys will be shown to be just as ridiculous as the Partnership for a Chicken-Free America. No matter how powerful an interest, how strong its incentives, or how corrupt the system, government can ultimately only do what people permit it to; and people will only permit it to do what they believe it capable of doing. Through education we can demonstrate just how incapable government is. In the end, despite the very real power of interests, ideas win.

To paraphrase Victor Hugo, “More powerful than an army of special interest lobbyists, is an idea whose time has come.”

But this is precisely backward. Existing problems of excess energy consumption, pollution, big-box stores, the car culture, and suburban sprawl result from the “massive political pressure” that has already been applied, over the past several decades, to “redesign our cities, our farming, and our lives.” The root of all the problems Monbiot finds so objectionable is State intervention in the marketplace.

In particular, subsidies to transportation have probably done more than any other factor (with the possible exception of intellectual property law) to determine the present shape of the American corporate economy. Currently predominating firm sizes and market areas are the result of government subsidies to transportation.

Adam Smith argued over 200 years ago that the fairest way of funding transportation infrastructure was user fees rather than general revenues: “When the carriages which pass over a highway or a bridge, and the lighters which sail upon a navigable canal, pay toll in proportion to their weight or their tonnage, they pay for the maintenance of those public works exactly in proportion to the wear and tear which they occasion of them.”

This is not, however, how things were actually done. Powerful business interests have used their political influence since the beginning of American history to secure government funding for “internal improvements.” The real turning point was the government’s role in creating the railroad system from the mid-nineteenth century on. The national railroad system as we know it was almost entirely a creature of the State.

The federal railroad land grants included not only the rights-of-way for the actual railroads, but extended 15-mile tracts on both sides. As the lines were completed, this adjoining land became prime real estate and skyrocketed in value. As new communities sprang up along the routes, every house and business in town was built on land acquired from the railroads. The tracts also frequently included valuable timberland. The railroads, according to Matthew Josephson (The Robber Barons), were “land companies” whose directors “did a rushing land business in farm lands and town sites at rising prices.” For example, under the terms of the Pacific Railroad bill, the Union Pacific (which built from the Mississippi westward) was granted 12 million acres of land and $27 million worth of 30-year government bonds. The Central Pacific (built from the West Coast eastward) received nine million acres and $24 million worth of bonds. The total land grants to the railroads amounted to about six times the area of France.

Theodore Judah, chief engineer for what became the Central Pacific, assured potential investors “that it could be done—if government aid were obtained. For the cost would be terrible.” Collis Huntington, the leading promoter for the project, engaged in a sordid combination of strategically placed bribes and appeals to communities’ fears of being bypassed in order to extort grants of “rights of way, terminal and harbor sites, and . . . stock or bond subscriptions ranging from $150,000 to $1,000,000” from a long string of local governments that included San Francisco, Stockton, and Sacramento.

Government also revised tort and contract law to ease the carriers’ way—for example, by exempting common carriers from liability for many kinds of physical damage caused by their operation.

Had railroad ventures been forced to bear their own initial capital outlays—securing rights of way, preparing roadbeds, and laying track, without land grants and government purchases of their bonds—the railroads would likely have developed instead along the initial lines on which Lewis Mumford speculated in The City in History: many local rail networks linking communities into local industrial economies. The regional and national interlinkages of local networks, when they did occur, would have been far fewer and far smaller in capacity. The comparative costs of local and national distribution, accordingly, would have been quite different. In a nation of hundreds of local industrial economies, with long-distance rail transport much more costly than at present, the natural pattern of industrialization would have been to integrate small-scale power machinery into flexible manufacturing for local markets.

Alfred Chandler, in The Visible Hand, argued that the creation of the national railroad system made possible, first, national wholesale and retail markets, and then large manufacturing firms serving the national market. The existence of unified national markets served by large-scale manufacturers depended on a reliable, high-volume distribution system operating on a national level. The railroad and telegraph, “so essential to high-volume production and distribution,” were in Chandler’s view what made possible this steady flow of goods through the distribution pipeline: “The revolution in the processes of distribution and production rested in large part on the new transportation and communications infrastructure. Modern mass production and mass distribution depend on the speed, volume, and regularity in the movement of goods and messages made possible by the coming of the railroad, telegraph and steamship.”

The Tipping Point

The creation of a single national market, unified by a high-volume distribution system, was probably the tipping point between two possible industrial systems. As Mumford argued in Technics and Civilization, the main economic reason for large-scale production in the factory system was the need to economize on power from prime movers. Factories were filled with long rows of machines, all connected by belts to drive shafts from a single steam engine. The invention of the electric motor changed all this: A prime mover, appropriately scaled, could be built into each individual machine. As a result, it was possible to scale machinery to the flow of production and situate it close to the point of consumption.

With the introduction of electrical power, as described by Charles Sabel and Michael Piore in The Second Industrial Divide, there were two alternative possibilities for organizing production around the new electrical machinery: decentralized production for local markets, integrating general-purpose machinery into craft production and governed on a demand-pull basis with short production runs and frequent shifts between product lines; or centralized production using expensive, product-specific machinery in large batches on a supply-push basis. The first alternative was the one most naturally suited to the new possibilities offered by electrical power. But in fact what was chosen was the second alternative. The role of the State in creating a single national market, with artificially low distribution costs, was almost certainly what tipped the balance between them.

The railroads, themselves largely creatures of the State, in turn actively promoted the concentration of industry through their rate policies. Sabel and Piore argue that “the railroads’ policy of favoring their largest customers, through rebates” was a central factor in the rise of the large corporation. Once in place, the railroads—being a high fixed-cost industry—had “a tremendous incentive to use their capacity in a continuous, stable way. This incentive meant, in turn, that they had an interest in stabilizing the output of their principal customers—an interest that extended to protecting their customers from competitors who were served by other railroads. It is therefore not surprising that the railroads promoted merger schemes that had this effect, nor that they favored the resulting corporations or trusts with rebates.”

Reprising the Role

As new forms of transportation emerged, the government reprised its role, subsidizing both the national highway and civil aviation systems.

From its beginning the American automotive industry formed a “complex” with the petroleum industry and government highway projects. The “most powerful pressure group in Washington” (as a PBS documentary called it) began in June 1932, when GM president Alfred P. Sloan created the National Highway Users Conference, inviting oil and rubber firms to help GM bankroll a propaganda and lobbying effort that continues to this day.

Whatever the political motivation behind it, the economic effect of the interstate system should hardly be controversial. Virtually 100 percent of roadbed damage to highways is caused by heavy trucks. After repeated liberalization of maximum weight restrictions, far beyond the heaviest conceivable weight the interstate roadbeds were originally designed to support, fuel taxes fail miserably at capturing from big-rig operators the cost of pavement damage caused by higher axle loads. And truckers have been successful at scrapping weight-distance user charges in all but a few western states, where the push for repeal continues. So only about half the revenue of the highway trust fund comes from fees or fuel taxes on the trucking industry, and the rest is externalized on private automobiles.

This doesn’t even count the 20 percent of highway funding that’s still subsidized by general revenues, or the role of eminent domain in lowering the transaction costs involved in building new highways or expanding existing ones.

As for the civil aviation system, from the beginning it was a creature of the State. Its original physical infrastructure was built entirely with federal grants and tax-free municipal bonds. Professor Stephen Paul Dempsey of the University of Denver in 1992 estimated the replacement value of this infrastructure at $1 trillion. The federal government didn’t even start collecting user fees from airline passengers and freight shippers until 1971. Even with such user fees paid into the Airport and Airways Trust Fund, the system still required taxpayer subsidies of $3 billion to maintain the Federal Aviation Administration’s network of control towers, air traffic control centers, and tens of thousands of air traffic controllers.

Eminent domain also remains central to the building of new airports and expansion of existing airports, as it does with highways.

Subsidies to airport and air traffic control infrastructure are only part of the picture. Equally important was the direct role of the State in creating the heavy aircraft industry, whose jumbo jets revolutionized civil aviation after World War II. In Harry Truman and the War Scare of 1948, Frank Kofsky described the aircraft industry as spiraling into red ink after the end of the war and on the verge of bankruptcy when it was rescued by the Cold War (and more specifically Truman’s heavy bomber program). David Noble, in America by Design, made a convincing case that civilian jumbo jets were only profitable thanks to the government’s heavy bomber contracts; the production runs for the civilian market alone were too small to pay for the complex and expensive machinery. The 747 is essentially a spinoff of military production. The civil aviation system is, many times over, a creature of the State.

The State and the Corporation

It’s hard to avoid the conclusion that the dominant business model in the American economy, and the size of the prevailing corporate business unit, are direct results of such policies. A subsidy to any factor of production amounts to a subsidy of those firms whose business models rely most heavily on that factor, at the expense of those who depend on it the least. Subsidies to transportation, by keeping the cost of distribution artificially low, tend to lengthen supply and distribution chains. They make large corporations operating over wide market areas artificially competitive against smaller firms producing for local markets—not to mention big-box retailers with their warehouses-on-wheels distribution model.

Some consequentialists treat this as a justification for transportation subsidies: Subsidies are good because they make possible mass-production industry and large-scale distribution, which are (it is claimed) inherently more efficient (because of those magically unlimited “economies of scale,” of course).

Tibor Machan argued just the opposite in the February 1999 Freeman:

Some people will say that stringent protection of rights [against eminent domain] would lead to small airports, at best, and many constraints on construction. Of course—but what’s so wrong with that?

Perhaps the worst thing about modern industrial life has been the power of political authorities to grant special privileges to some enterprises to violate the rights of third parties whose permission would be too expensive to obtain. The need to obtain that permission would indeed seriously impede what most environmentalists see as rampant—indeed reckless—industrialization.

The system of private property rights . . . is the greatest moderator of human aspirations. . . . In short, people may reach goals they aren’t able to reach with their own resources only by convincing others, through arguments and fair exchanges, to cooperate.

In any case, the “efficiencies” resulting from subsidized centralization are entirely spurious. If the efficiencies of large-scale production were sufficient to compensate for increased distribution costs, it would not be necessary to shift a major portion of the latter to taxpayers to make the former profitable. If an economic activity is only profitable when a portion of the cost side of the ledger is concealed, and will not be undertaken when all costs are fully internalized by an economic actor, then it’s not really efficient. And when total distribution costs (including those currently shifted to the taxpayer) exceed mass-production industry’s ostensible savings in unit cost of production, the “efficiencies” of large-scale production are illusory.