“We’re the country that built the intercontinental railroad,” Obama says. “So how can we now sit back and let China build the best railroads?”

I guess Obama doesn’t know that the transcontinental railroad was a Solyndra-like Big Government scandal. The railroad didn’t make economic sense at the time, so the government subsidized construction and gave the companies huge quantities of the best land on the continent. As we should expect, without market discipline—profit and loss—contractors ripped off the taxpayers. After all, if you get paid by the amount of track you lay, you’ll lay more track than necessary.

Crédit Mobilier, the first rail construction company, made enormous profits by overcharging for its work. To keep the subsidies flowing it made big contributions to congressmen.

Where have we heard that recently?

The transcontinental railroad lost tons of money. The government never covered its costs, and most rail lines that used the tracks went bankrupt or continued to be subsidized by taxpayers. The Union Pacific and Northern Pacific—all those rail lines we learned about in history class—milked the taxpayer and then went broke.

One line worked. The Great Northern never went bankrupt. It was the railroad that got no subsidies.

We need infrastructure, but the beauty of leaving most of these things to the private sector—without subsidies, bailouts, and other privileges—is that they would have to be justified by the profit-and-loss test. In a truly free market, when private companies make bad choices, investors lose their own money. This tends to make them careful.

By contrast when government loses money, it just spends more and raises your taxes, or borrows more, or inflates. Building giant government projects is no way to create jobs. When government spends on infrastructure, it takes money away from projects that consumers might think are more important. When government isn’t killing jobs by sucking money out of the private sector, it kills jobs by smothering the private sector with regulation. I talked to Peter Schiff about all this. Schiff is a good authority because he was one of the few people to warn of the housing bust. Now he’s had a run-in with the federal government over job creation.

Schiff, who operates a brokerage firm with 150 employees, recently complained to Congress that “regulations are running up the cost of doing business, and a lot of companies never even get started because they can’t overcome that regulatory hurdle.”

Schiff claims he would have hired a thousand more people but for regulations.

“I had a huge plan to expand. I wanted to open up a lot of offices. I had some capital to do it. I had investors lined up. My business was doing really well. But unfortunately, because of the regulations in the securities industry, I was not able to hire.”

People don’t appreciate the number of regulations entrepreneurs face. Schiff pays ten people just to try to figure out if his company is obeying the rules.

“Even my brokers . . . find out that maybe 20 percent, 30 percent of their day is involved in compliance-related activity, activity that is inhibiting their productivity. . . . All around the country, people are complying with regulations instead of producing, instead of investing and growing the economy. They’re trying to survive the regulations,” he said.

This is no way to create jobs or wealth. Keynesian pundits and politicians can’t understand why businesses sit on cash rather than invest and hire unemployed workers. It’s really no mystery. Government is in the way.

But is that so? Without denying the value of perseverance, and recognizing that the slogan “never give up” can be useful in overcoming certain obstacles, we must keep in mind that failure can act as a guide to more worthwhile activities. For example, in 1921 Walt Disney started a company called the Laugh-O-Gram Corporation, which went bankrupt two years later. If a friend of Disney or the government hadn’t let him fail and move on, he might never have become the Walt Disney we know today.

More important than this individual learning process is the irreplaceable role failure plays in the social learning process of the competitive market. When we refuse to allow failure to happen, or we cushion its blow, we ultimately harm not only the person who failed but also all of society by denying ourselves a key way to learn how best to allocate resources. Without failure there’s no economic growth or improved human well-being.

Economists, especially those of the Austrian school, often emphasize how entrepreneurs discover new knowledge and better ways of producing things. But entrepreneurial endeavors frequently fail and the profits thought to be in hand often don’t materialize. According to the U.S. Small Business Administration, over half of small businesses fail within the first five years. But failed entrepreneurial activity is just as important as successful entrepreneurial activity. Markets are desirable not because they lead smoothly to improved knowledge and better coordination, but because they provide a process for learning from our mistakes and the incentive to correct them. It’s not that entrepreneurs are just good at getting it right; it’s also that they (like all of us) can know when they’ve got it wrong and can obtain the information necessary to get it right next time.

On this view failure drives change. While success is the engine that accelerates us toward our goals, it is failure that steers us toward the most valuable goals possible. Once failure is recognized as being just as important as success in the market process, it should be clear that the goal of a society should be to create an environment that not only allows people to succeed freely but to fail freely as well.

The Knowledge Problem

Understanding this point requires a broader vision of the market process. For Austrian economists the fundamental economic problem is not the efficient allocation of given resources to our most valued ends at a given time, but rather how we overcome the “knowledge problem”—the division of knowledge that characterizes the social world. It is more important to figure this out than to master the problem of resource allocation because new knowledge drives economic growth and creates prosperity. If the main task of the market were merely to allocate known resources to their most efficient uses, economic growth would seem impossible, since we would be stuck in a primitive world. Where is there any room for the innovation or change that drives progress and improves our lives? If a plow is deemed the most efficient use of iron and all iron is constantly allocated to making plows, how could iron ever be allocated for a new invention such as a tractor? The answer is that entrepreneurs change the most efficient use of resources by discovering new uses. By understanding the economic problem posed by limited, unique, and dispersed knowledge, we can better understand the role failure plays in coping with this problem.

Competition figures prominently in this system. Competition promotes entrepreneurial activity and the discovery of knowledge by empowering a variety of decision-makers to try to find new and better ways of using resources as well as new ends to achieve. This decentralization ensures that what F. A. Hayek called the local knowledge of time and place will be best used. Centralized planning, like other forms of government allocation, necessarily relies on the knowledge of fewer people, limiting discovery and restricting knowledge-dissemination to fewer channels. Competition is a better way to overcome the knowledge problem.

Failure and Opportunity

We can understand the role of failure if we recognize, as Ludwig von Mises did, that all human action intends to “remove felt uneasiness.” We are always striving to improve ourselves by achieving our highest valued ends as often as we can. On these terms, failure is all around us because no human ever achieves a complete lack of felt uneasiness. We always have unsatisfied ends. Israel Kirzner uses the term “alertness” to describe how the entrepreneurial element of human action identifies which ends to strive for and which means are available. Kirzner says that for market action to occur, entrepreneurs must first be alert to opportunities for profit. The possibility of profit keeps entrepreneurs alert to the ways people strive for ends or make use of means that fail to remove felt uneasiness. Once they’ve noticed this failure in human knowledge, the same opportunity for profit spurs entrepreneurial activity to find a new way to achieve those ends, or to find better ends themselves. So a failure in human knowledge becomes the catalyst for producing new knowledge via the entrepreneurial process.

When entrepreneurs attempt to correct a particular failure in knowledge, they often fail themselves and incur losses because of competition. Although bankruptcy is painful in the short term, such failure is an integral part of how entrepreneurial activity and the market function. Failure in a competitive society informs market participants about which activities or jobs to strive for and which to avoid, lest they waste time and money. Jobs that add value to society should be pursued, while those that fail to add value should be eliminated. Markets help guide market participants far better than any bureaucracy can because bureaucracies lack the market’s key components of competition, profit, and loss, which reveal failures and allow for their correction.

Because competition is a voyage into the unknown, we can only know after the fact what works and what does not. Thus economic failure is not “waste.” Calling entrepreneurial failure a “waste” implicitly assumes that one knew ahead of time what the best use of resources was. Such knowledge is not available to anyone, which is why failure is necessary to provide the needed signals.

The subsidies, bailouts, stimulus packages, and other interventions that now increasingly characterize the U.S. economy disrupt this process. Farm subsidies (including cheap water out west), for example, prevent entrepreneurs from finding and capitalizing on failures of knowledge in farming. While there may be new and better ways to grow food, it is difficult for entrepreneurs to find this out if farmers are kept afloat by the government. Perhaps decentralized, local farming would be discovered as more profitable if larger monoculture farms that are possibly damaging the environment were allowed to fail. By preventing inefficient methods of production from suffering losses, subsidies reduce the degree of failure in agricultural markets and make it harder to know that misallocation has taken place and to correct it.

Not letting Chrysler and General Motors fail during the Great Recession prevented an entrepreneurial response to this misuse of resources. The bailouts created two types of negative incentives. First, the companies were encouraged to keep making cars when their losses showed the resources and labor could better be used elsewhere. Second, the government deterred any new entrepreneur from entering the industry and doing things better. Many politicians defended the bailout because they did not want the hundreds of thousands of autoworkers to become unemployed. But when hundreds of thousands of workers become unemployed they do not disappear. They find different jobs that would contribute to society in a better way than working for a bankrupt auto company. The physical assets of bankrupt companies also get reallocated to alert entrepreneurs looking for bargains. Failure is necessary for learning and for success.

The Keynesian argument for government jobs programs is that any sort of work will restart spending in a recession, even hiring people to dig ditches and fill them up. But do a higher GDP and a job by themselves make society better off? Would it be better to have a 2 percent unemployment rate with 8 percent of the employed population doing jobs that don’t add real value (so around 10 percent of the labor force is not adding real value) or more unemployment with everyone who is working really adding value?

Unemployment

Unemployment is a form of failure, and it involves the same considerations as when businesses fail. If a job no longer contributes value this needs to be made clear so that those workers can find jobs that actually do. Imagine if the disemployment of farmers had been prevented during the transition to an industrial economy. In 1941, 41 percent of the U.S. workforce was in agriculture. In 2011 the portion was 3 percent. Where would industry be today if we had prevented the majority of the 41 percent from losing their jobs and finding new ones? It is right that this sort of “failure” was allowed to occur because the displaced farmers found new jobs in the cities and elsewhere. Those new jobs helped society transition from agriculture to industry to services, creating even newer jobs all along the way. This is strong evidence that learning from failure takes place in labor markets.

Autopoiesis (life’s continuous production of itself) is one of the principal characteristics of life, and constant change is its essence. This applies to the economy as well. For us to maintain or increase a high standard of living we must constantly change how we do things. This change won’t be fueled by lucky guesses or by bureaucratic decrees, but instead often by entrepreneurial activity in the face of failure in the market. Since that activity drives the train of progress, it is in society’s interest that the tracks be cleared of governmental obstacles.

Reigning politicians were also blackguards, and audacious ones. A “surprising number” of America’s economic movers and shakers hailed from New England. Entrenched Republicans became wholly committed to Henry Clay’s dream of State-assisted industrialization and “paternalism as understood by speculators and subsidy-hunters” (Parrington). Government as fairy godmother could not, however, subsidize everyone: “Governmental gifts go to the largest investments”—a survival of the wiliest under laissez-faire slogans. Here were the men called “Robber Barons” by their critics.

Between 1900 and the 1940s historian Charles A. Beard and popular writers like Matthew Josephson, Gustavus Myers, and John T. Flynn followed this interpretive line. But historical fashions change. World War II taught Americans the virtues of bigness in government and business. The waning Old Right forgot the two-front war against big government and big business once waged by Senator William Borah (R, Id.). The emerging Cold War involved projects sustainable only by large organizations. Beard died in 1948, having sinned by disputing FDR’s foreign policy, and his historical views suffered by association with “isolationism.”

By the 1950s only a few leftover populists like Senator Estes Kefauver of Tennessee kept up Borah’s old fight. Historians Ralph and Muriel Hidy, Hal Bridges, and many others found much to praise in late-nineteenth-century big business. Bridges’s essay “The Robber Baron Concept in American History” (1958) lauded Gilded Age industrialists as constructive wealth creators. In “The Robber Baron Concept and Its Revisionists” (1965), New Left historian Alan Solganick tried to reignite debate, suggesting that Gilded Age capitalists put short-run profit ahead of potential technical advances. In recent history textbooks “Gilded Age” appears but without “Robber Barons.”

Taking up where business-oriented elements of the Old Right left off, classical liberals generally see the Gilded Age and alleged Robber Barons as historically vindicated. Fear that concessions to Gilded Age critics will immediately justify big government as social savior seems to require excuses for past economic malefactors. Still, classical liberals Arthur A. Ekirch, Jr., George Roche III, Wilhelm Röpke, Albert Jay Nock, former Freeman editor Frank Chodorov, and Felix Morley did not wholly reject the Populist-Progressive indictment.

Ironbound Folly

The key growth sector from the mid-nineteenth century on was railroads, no stranger to government subsidies. These proved very profitable for promoters and land speculators. But if railroads revolutionized commercial traffic, creating bigger markets and therefore larger-scale enterprises, by 1880 they looked like massive overinvestments with shaky foundations. America had a transportation system so far ahead of natural migration that railroads had to scare up their own settlers. New lines built solely to block competitors aggravated the overextension. Accidents affecting workers and passengers alike were numerous. The recurring cycle of bankruptcy, reorganization, debt reduction, and renewed promotion with watered stock leads historian Ray Ginger (The Age of Excess) to wonder whether, overall, the average return on railway investment was actually negative.

Railroads’ power to set rates arbitrarily became a major public issue. Senator Thomas Benton of Missouri had argued in the 1850s that if given federal subsidies, railroads must serve as public highways leased to private operating companies and open to all on an equal basis. This was not quite what the public got, but the highway metaphor did return during the great railroad strike of mid-1894 to explain how President Cleveland could send federal troops into Illinois over the governor’s protests.

As noted in my “Civil War and the American Political Economy” (Freeman, April 2011), subsidized railroads pioneered large-scale private bureaucracy under the corporate form and their example promoted the form. All this encouraged further concentration of capital, as had the war itself.

Business Practices and Ethics

Bigger markets and larger enterprises rested on various advantages, almost always political in nature, such as large grants of land (including mineral rights), perpetual franchises and rights of way, control of raw materials, transportation subsidies (railroad and highway construction), superior access to transportation, differential shipping rates, control over distribution, public franchises, charters, licenses, tariffs, direct government subsidies and loans, patents, copyrights, privileged banking, and sundry direct or hidden grants of monopoly, including virtual (regulatory) cartels.

All these levers abounded in the Gilded Age—typically for the right price. Tramway entrepreneur Charles Tyson Yerkes’s open buying of franchises from Chicago aldermen finally provoked support for so-called municipal “socialism.” In addition businessmen engaged in patent wars and constant litigation to harass competitors.

Tariffs drained money from the countryside into industrialists’ coffers. The Tennessee Coal, Iron and Railroad Company, headed by U.S. Rep. Thomas C. Platt (R, NY), managed to benefit from both tariffs and convict labor. Generally, the defeated South succumbed to northern capital: to Hamilton Disston, who bought nearly half of Florida; J. P. Morgan, who reorganized the southern railroad system; and sundry timber companies. Sharecropping (black and white), the crop-lien system, and “reckless destruction” of forests by timber companies typified the new southern economy (Ginger).

Even before 1861, Thomas C. Cochran and William Miller (The Age of Enterprise) write, “New York, New England, and Pennsylvania had gathered up the funds of the nation, had developed financial techniques to manipulate them, and mastered the arts of credit expansion.” After 1865 bankers—much preferring gold to whatever they had previously lent—lobbied for imposed deflation through retirement of Greenbacks. Large federal tariff revenues (about a third of the possible money supply) sat idle in the Treasury contributing to deflation. Money for new enterprises had to come from established financial gatekeepers, who did well through legally-sanctioned fractional-reserve magic and other devices.

Overproduction, Cartels, De-Skilling

The economies of scale made possible by transportation subsidies forced companies to invest more in fixed (physical) capital while trying to keep variable costs (including labor) low. As Andrew Carnegie noted, industrialists had to keep their machinery “running full.” But doing so produced goods unsellable (profitably) at home. U.S. Commissioner of Labor Carroll D. White declared overproduction “a permanent feature of the economy.” Such statements abounded, and farmers’ groups likewise took up the cry. This led from the 1880s forward to much discussion of “over-saving” and “over-production.” Two interim solutions suggested themselves: cartels to restrict production and the reorganization of work itself. Early attempts at cartelization failed for lack of direct State support, and corporations turned to the second plan. If craft skills could be (in effect) built into new machinery, unskilled labor could replace skilled workers at lower costs. This “de-skilling” would reduce workers’ bargaining power, increasing managerial control, and shift a higher proportion of income from added value to the corporation. A third option, overseas economic empire with foreign markets for “surplus” products, was discussed but was as yet premature.

Flynn and the “Brigand Theory of Progress”

Assessing this period in Men of Wealth (1941), John T. Flynn showed a keen grasp both of basic facts and fundamental issues. At bottom he agreed with ex-New Dealer Willis J. Ballinger (By Vote of the People) that America’s financial masters had “systematically misoperated” the economy for almost a century. Flynn could not accept “the brigand theory of progress,” which excused the hurried methods of nineteenth-century capitalists on grounds of their services to long-run productivity. Many were simply “rascals . . . driven by a consuming passion for getting other people’s money.” Commodore Vanderbilt pioneered methods “of inflating the capitalization of railroads, utilities, and corporate enterprises of all sorts.” Vanderbilt, Gould, Fisk, Drew, and others perfected “the mechanisms of exploitation of properties through stock manipulations” with “vast gains that did not come out of the property at all.”

Flynn found fascinating the synergy between bank “money actually created in the act of lending it” (his italics), watered stock, limited liability, holding companies, and new companies launched entirely to provide quick profits to promoters. Government-tainted finance capitalism had begun in Lowell and Boston by 1837, but J. P. Morgan had perfected its destructive capacities by controlling both banks and corporations issuing securities. This long train of abuses related directly to the corporate form: “the mightiest weapon of all.” (As Thurman Arnold [The Folklore of Capitalism] wrote in 1937, “[C]apital came to mean the ability to control bank credits, which had no particular relation to productive property.”)

Flynn saw Rockefeller as fairly honest and innocent of stock manipulation, but on the downside, a forerunner of corporatism and, in this way, of the coming American New Deal fascism. (Corporatism, formal or informal, would not be realized until many decades later.)

Flynn is onto something: the centrality to the Gilded Age of stock gambling and fictitious capital, a circumstance that might well undercut Ludwig von Mises’s claim (reported by Rothbard) that a stock market is a sure sign of a free market. One begins to suspect that stock markets along with powerful government-aided banks and corporations are instead the surest sign of rigged markets. In Flynn’s account, few famous nineteenth-century capitalists come out unscathed; instead, they emerge as money-chasing rascals working just this side of the law—a small feat, given their ability to move the law around as needed, whether through bribery or the partisan, pro-commercial efforts of the average judicial mind, state and federal.

The Rule of Law

Pro-commercial jurisprudence thrived in the industrializing states, while a uniform national commercial code to foster industry and “progress” was normally a special project of the federal (and ideologically federalist) judiciary. Once the Great Barbecue vested sufficient interests (Nock’s “primal distribution” of productive resources), the interests naturally proclaimed a free market, which the judges contrived to define in their favor. Federal courts duly told states that powers they had granted to corporations were now federal rights under the contract clause, forevermore beyond recall. Broadly speaking, the law was malleable, activist, and pro-commercial. Law professors William J. Quirk and R. Randall Bridwell (Abandoned: The Betrayal of the American Middle Class Since World War Two) find the federal judiciary “‘conservative’ of the prerogatives of business and capital, but . . . not ‘conservative’ of the institutional arrangements established by the U.S. Constitution. . . .”

As seen by historian Frank Tariello (The Reconstruction of American Political Ideology), American classical liberalism was (after 1865) an increasingly flabby ideology. Faced with intellectual—and mass—revulsion against the society under construction, liberals joined business in defending existing arrangements, pointing irrelevantly at dangerous foreign communists. Gilded Age liberal reformers, above mere politics, hoped to combine “laissez faire” with efficient new bureaucracies and restrictions on “unreliable” voting blocs.

All That’s Gilded Is Not Gold

Louis Bromfield (A Few Brass Tacks), a late arrival to the Old Right, questioned the alleged genius of America’s Gilded Age industrialists and bankers. Making a great deal of money under “fantastically favorable conditions”—adequate capital, low-cost labor, and resources seized for next to nothing—seemed no great achievement. Arthur Ekirch’s account of the Gilded Age in The Decline of American Liberalism (1955) uses Parrington’s terms, “Preemption, Exploitation, Progress,” and closely follows Parrington’s treatment. While regarding Rockefeller, McCormick, Armour, and Carnegie as genuine producers, George Roche III (The Bewildered Society), a former FEE staff member and later president of Hillsdale College, found much room for complaint in actually existing capitalism. The key was the modern corporation, originating in State power and fostering oversized bureaucracy and mass society. Citing Nock, Roche protested “the unabashed economism which dominates our age” and expressed doubt that “the enmassment of American business is an absolute prerequisite for large-scale production.”

We could just note the Robber Barons’ achievements and move on. But what if their few ideas and many practices had serious systemic consequences? Was there any way out? Progressives—waiting in the wings—believed so, but had conflicting answers. And there is another interesting story, not fully covered by easy fables told by Glenn Beck and Jonah Goldberg.

Dear Sir: Thanks for sending me your thoughts lamenting the idea of cuts in arts funding by state and federal governments. In my mind, however, the fact that the arts are wildly buffeted by political winds is actually a powerful case against government funding. I’ve always believed that art is too important to depend on politicians, too critical to be undermined by politicization. Furthermore, expecting government to pay the bill for it is a cop-out, a serious erosion of personal responsibility and respect for private property.

What Multiplier?

Those “studies” that purport to show X return on Y amount of government investment in the arts are generally a laughingstock among economists. The numbers are often cooked and are almost never put alongside competing uses of public money for comparison. Moreover, a purely dollars-and-cents return—even if accurate—is a small part of the total picture.

The fact is, virtually every interest group with a claim on the treasury argues that spending for its projects produces some magical “multiplier” effect. Routing other people’s money through the government alchemy machine is supposed to somehow magnify national wealth and income, while leaving it in the pockets of those who earned it is somehow a drag. Assuming for a moment that such preposterous claims are correct, wouldn’t it make sense from a purely material perspective to calculate the “average” multiplier and then route all income through the government? Don’t they do something like that in Cuba and North Korea? What happened to the multiplier in those places? It looks to me that somewhere along the way it became a divisor.

What if, for instance, “public investment” simply displaces a certain amount of private investment? (Arts subsidy advocates never raise this issue, but I know that I personally am far less likely to make a charitable contribution to something I know is on the dole than to something I know rests on the good hearts of willing givers). What if “public investment” brings with it some baggage like political manipulation that over time erodes the integrity of the recipient institutions? How does that fit into the equation? What if I, as a taxpayer who earned the dollars in the first place, could keep what the government would otherwise spend on the arts and invest it in my kid’s college education and end up getting twice the return on my money that the government would ever get on the arts?

If simply getting a good return qualifies an activity for public investment and government involvement, then I can think of hundreds of companies and industries that government “should” have spent tax money on—from silicon chips to Berkshire Hathaway. The Constitution’s framers could have dispensed with all that rigmarole about rights of citizens and duties of government and stopped with a preamble that said only, “We the People, in order to get a high return on our tax money, establish this government to do whatever anybody can show will fetch a hefty payback.”

Sometimes those of us who put faith in such things as the individual, private property, and the marketplace are accused of focusing solely on dollars and cents. But actually, it’s those on the other side who are more guilty of this. The arts funding issue is a case in point. Advocates of government funding focus on dollars—more of them, always more of them—and no matter how much government funding of the arts we have, it’s never enough.

Meaningful Money

Those of us who wish to nurture the arts privately stress other, far more important values. I believe, for example, that money which comes voluntarily from the heart is much more meaningful than money that comes at gunpoint (which is ultimately what taxes are all about). You’ve won so much more when you convince people to do the right thing, or support the right causes, because they want to instead of because they have to. For that reason I don’t believe in shotgun marriages either.

I can think of an endless list of desirable, enriching things, very few of which carry a tag that says, “Must be provided by taxes and politicians.” A rich culture consists, as you know, of so many good things that have nothing to do with government, and thank God they don’t. We should seek to nurture those things privately and voluntarily because “private” and “voluntary” are key indicators that people believe in them.

The surest way I know to sap the vitality of almost any worthwhile endeavor is to send a message that says, “You can slack off; the government will now do it.” That sort of flight from responsibility, frankly, is at the source of many societal ills today: Many people don’t take care of their parents in their old age because a federal program will do it. Most parents these days shirk their duties to educate their kids because government schools are supposed to do that (even though many of them do a miserable and expensive job of it).

What’s Important

I know that art is just about everything to some people, especially those whose living derives from it. But as adults we have to resist the temptation to think that what we are individually doing is somehow the greatest thing since sliced bread and that therefore it must receive more than what people willingly give it.

I think what my church does is important, but I don’t want government giving it money. I think what we do at FEE is important, but we’d go out of business before we’d take a nickel of somebody’s money against his will. I might even like certain nongovernment-funded art forms more than the ones that are politically well connected enough to get a grant, but I don’t want to corrupt them with a government check. As children we want what we want and we want it now, and we don’t care where it comes from or even if somebody has to be robbed for us to get it. But as discerning adults who put a higher premium on mutual respect and building a culture that rests on creativity and persuasion over coercion, we should have different standards.

Lots of things are important in life. Spare us the sanctimonious and self-serving nonsense about taking other people’s money for the art you happen to think they should pay for.

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.

Listen to the audio file here.

Brooks does identify some real problems: for instance, that competition between the two major parties has become “fratricidal” and theatrical, and that it is creating massive budget deficits that, left unchecked, will prove catastrophic. But his diagnosis of the problem and his proposed solutions are fraught with fallacies.

He thinks that a revived patriotism will “lift people out of their partisan cliques,” yet the current partisan tribalism seems not to be lacking in patriotism. As is often the case, much hangs on how one understands the terms.

What makes a country great? One way to answer this involves claiming that there is something special about the ethnic makeup of the people who comprise it. For Mussolini there was something great, something special, about being Italian; his allies in Germany and Japan had similar theories about their respective nationalities. But that approach won’t quite work for America since it comprises people of many ethnicities.

Another way to understand national greatness is in terms of institutions and operating principles. But institutions and principles can change. What would make a country great on this model would be to have great institutions grounded in great principles. The Declaration of Independence is an example of this approach: Begin with a set of principles (moral equality of all persons, the natural right to live and be free, power only justified by consent) and then appeal to it when creating institutions (limited government of enumerated powers, republican structure with a democratic franchise, church-state separation, citizen militia, free trade). On this model America is great inasmuch as its institutions reflect its principles. A nation that claims to be dedicated to the principles outlined in the Declaration fails to be great when it invades foreign lands, abuses its citizens’ liberties, or forbids the free movement of people and goods.

Brooks’s exhortations reveal a lack of clarity about different senses of greatness, which comes out most clearly in his repeated use of false dichotomies. He asks, for example, “Do you really love your tax deduction more than America’s future greatness?” This alternative presupposes that it is only through higher taxes that a nation can become great. This in turn assumes that national greatness is only measured by things done by the government. What might these be? Scholarly, artistic, and technological greatness might well be better fostered by individuals having more money and freedom.

“Are you really unwilling,” he asks, “to sacrifice your Social Security cost-of-living adjustment at a time when soldiers and Marines are sacrificing their lives for their country in Afghanistan?” It’s not clear that solving other countries’ problems is how we measure our own greatness. In any event, this question also reveals a confusion: equating national greatness with government spending. Instead of asking whether Social Security payouts should rise with inflation, we might ask whether we would be better off as a nation of financially independent and responsible people who didn’t look to the political system for retirement income. Instead of wondering how high taxes have to be to fund overseas military campaigns, we might ask whether those campaigns need to be undertaken by the government (as opposed to either being undertaken by privateers or not at all). One way to measure American greatness might be the extent to which we exemplify peace and prosperity. The best way to achieve those ends would be to limit (or even better, eliminate) coercive interference with other people’s lives.

Lost Preeminence

Brooks laments a lost preeminence, but it isn’t clear what he means by that. He might be referring to a late-1940s preeminence, when America, having helped destroy the Nazis and their Japanese allies, led the way in rebuilding those nations and helping them become prosperous liberal democracies. But today’s “nation-building” looks very different. Unlike World War II, which actually ended, the current wars of nation-building seem perpetual, which suggests that a different course of action might have better results.

Or perhaps Brooks is referring to a time when American preeminence was measured in contrast to the privations of the old Soviet Union. In that case, let’s review the lessons of that contrast: Our former adversaries in the communist world were impoverished because tyranny doesn’t work as well as freedom. Besides the soul-crushing dehumanization of a system that doesn’t recognize fundamental liberties, the centrally planned socialist economic system turned out to be incapable of generating an abundance of goods and services. So if Brooks wants to see American preeminence regained, he might do better to promote liberalization of the world’s economic systems, which, again, is best done by example.

Brooks’s general rhetorical approach is to frame the debate between “liberals” and “conservatives” as a stubbornness game in which both sides must yield in order to bring about “a governing philosophy that believes in targeted federal efforts to arouse growth, social mobility and responsibility.” As it happens, the free-enterprise system does precisely these things, but most politicians can’t understand that this requires not action on their part, but inaction. They must stop interfering with people’s lives, not look for new ways to do it; protect liberty not abridge it. Brooks fallaciously conflates subsidies with tax reductions, but this implies that people are not the owners of their property. If the government takes money from Peter and gives it to Paul, that’s a subsidy to Paul. But if the government takes less money from Peter, that’s not a subsidy to Peter, since it’s Peter’s property to begin with. Brooks’s calls to end subsidies are correct, but the word doesn’t mean what he thinks it does.

In a way, then, Brooks is right: America has lost some of its greatness and needs to take steps to regain it.

But the problem isn’t people who want to bring the troops home or keep more of their money. Indeed, bringing the troops home would make it easier for people to keep more of their money. So would ending drug prohibition. So would allowing free trade and free human migration. National greatness, American-style, does not consist of the storied pomp of ancient lands, but rather of the opportunities illuminated by the lamp of liberty.

Those two sentences helped focus the Progressive worldview. First, the United States needed an income tax to capture large chunks of revenue. Second, someone who had a large fortune, “by the mere fact of its size,” had to be treated differently from other wealth holders. Property rights became variable. One group would be treated one way, other groups would be treated another way. Third, the nation needed a “graduated income tax” to redistribute wealth from the haves to the have-nots. The new tax slogan would be “ability to pay.”

Author Delos Kinsman, writing while Roosevelt was president, said, “Individuals should contribute to the support of the government according to ability.” And “income is the most just measure of that ability.” Enlightened leaders like Teddy Roosevelt would redistribute wealth in the national interest.

Roosevelt’s thinking was a profound change from the views of the Founders. To them, government existed to protect property, not redistribute it. Americans had a right to pursue life, liberty, and property, not an entitlement to it. Thus the Founders never considered raising revenue through an income tax, least of all a graduated one. They wanted consumption taxes—levies on imports or on luxury goods. Why? Because, as Alexander Hamilton said in Federalist 21, “The amount to be contributed by each citizen will in a degree be at his own option, and can be regulated by an attention to his resources.”

Hamilton added, “If duties are too high, they lessen the consumption; the collection is eluded; and the product in the treasury is not so great. . . . This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.”

American law also reinforced the use of consumption taxes. “All duties, imposts and excises shall be uniform throughout the United States,” the Constitution reads. What could be more uniform than Congress’s first excise tax of seven cents a gallon on all whiskey produced in the United States?

Not Good Enough

Progressives, however, disliked consumption taxes as the major source for revenue. They were too small, too cumbersome to collect, and sometimes too regressive—wealth never properly redistributed itself through consumption taxes. Taxes on whiskey, tobacco, and imported olives from Spain shifted very little, if any, wealth from rich to poor. In 1913 the House Ways and Means Committee observed that federal revenue rested “solely on consumption. The amount each citizen contributes is governed, not by his ability to pay taxes, but by his consumption of the articles needed.” Swollen fortunes, as Roosevelt might say, went untaxed and became more swollen while some immigrants lived in poverty.

The Sixteenth Amendment was ratified in 1913, giving Congress the “power to lay and collect taxes on incomes from whatever source derived.” It did not rule out “ability to pay” as the basis for the levy. The amendment became law just as Woodrow Wilson was coming into the presidency. As a Progressive, Wilson wanted to start small, establish a precedent, and then increase rates over time. Under the new tax law, exemptions were so high that few Americans earned enough to pay any tax. Rates started at 1 percent and rose slowly to a high of 7 percent on all income over $500,000.

Progressives easily sold this tax plan to the voters. Fewer than one American family in 100 paid anything, but politicians could promise audiences that they might receive benefits from the revenue. And who would dare to suggest that billionaire John D. Rockefeller did not have the ability to pay 7 percent of his huge income to the government?

Ability to Pay

Yet that raises an interesting question. At what tax rate did Rockefeller, or other wealthy men, cease to have the ability to pay? If they could pay 7 percent, could they pay 15? Apparently so, because in 1916 Wilson and Congress raised the top rate to 15 percent. Unlike with a consumption tax, under the income tax politicians judge ability to pay and they choose the rates they think rich people can afford. If politicians choose rates too high they may lose the support of the rich, but they may gain support of those larger groups receiving subsidies from the tax revenue. If wealth really needs to be redistributed, should we trust people to do it with their own money or politicians with other people’s money?

Rockefeller, for example, was the best and cheapest oil refiner in the world. His charitable giving included the Erie Street Baptist Church, a cure for meningitis, and funding for Tuskegee Institute. That was how he redistributed his own wealth. Andrew Carnegie, the steel baron, built libraries, and banker Andrew Mellon built the National Gallery of Art in Washington, D.C. In the political realm, President Franklin Roosevelt supported high taxes and gave subsidies to silver miners, farmers, and the Tennessee Valley Authority to make cheap electric power.

Charitable givers and politicians both pursue their self-interest, but the politician’s self-interest includes winning votes. That means, if possible, channeling subsidies to voting groups to win reelection at the expense of taxpayers in general. Rockefeller’s gifts to Tuskegee did not cost anyone but him any money. FDR’s subsidy to silver miners, by contrast, cost millions of taxpayers small amounts of tax revenue. It helped FDR carry several western states each time he ran for president. His redistribution efforts were essential to his being reelected.

Thus U.S. politicians had incentives to steadily increase the income tax in the 1900s. The top rate went from 7 to 15 percent in Wilson’s first term. World War I took it over 60, then over 70 percent. It didn’t drop below 50 percent until 1924, and was about 25 percent the rest of the decade. The rate rose to 63 percent in 1932 under Herbert Hoover and then 79 percent in 1935. The World War II years pushed it over 80 percent, and in 1945, FDR’s last year in office, the top was 94 percent on all income over $200,000. Wealthy people apparently had a very high ability to pay, and politicians had a very high desire to fight wars and win elections.

We may think here of large “forces” at work, each with limits and counter-tendencies. Where slavery is concerned, Americans shirked the job of finding a reasonable solution. Offered one—disunion—some rejected it, after which the blunt instrument of war permitted another solution of sorts. As historian Howard Zinn writes: It was not the moral enormity of slavery but “the antitariff, antibank, anticapitalist aspect of slavery which aroused the united opposition of the only groups in the country with power to make war: the national political leaders and the controllers of the national economy.”

Political scientist Thomas Ferguson believes that the goals of money-driven coalitions explain the greater part of American political history. During the mid-nineteenth century, railroads represented the biggest new business opportunity, provided large-scale government subsidies (state and federal) were available. Northern railroad promoters and land speculators, many based in New England, worked both to get subsidies and remove obstacles. On the removal side, some of them, like John Murray Forbes, donated money to John Brown’s good works in Kansas apparently to put pressure on southern opponents of internal improvements.

The Republican Party platform of May 1860 stated the minimal program of a historical bloc of northeastern financial and manufacturing interests and Midwestern and western farmers. It began on a high note of egalitarian and republican ideology, aired some Free Soil, antislavery grievances, and thudded to rest with some practical matters: protective tariffs, homesteads (good for votes but rather ambiguous), federally funded improvements of rivers and harbors (Great Lakes subsidies), and a Pacific railroad. In addition, the party’s friendliness to central (national) banking was no secret. The Hamiltonian mercantilism of the platform was its central theme, if not quite its only one. Alas for its adherents, they soon found a large bloc of their recent opponents (and potential taxpayers) leaving the Union, beginning with South Carolina in December 1860.

The opposition to northern mercantilism had removed itself from the system. “Why fight to bring it back?” historians Thomas C. Cochran and William Miller ask. Over the Secession Winter of 1860–1861 many northerners asked just that question. Matters were, after all, rather complex. Key New York trading interests were heavily involved with southern cotton—the petroleum of the mid-nineteenth century—and New England manufacturers processed it. If the incoming administration refused to accept secession and used force to retain states allegedly “in rebellion,” war would come. Many agreed that, generally speaking, war was never good for business as a whole. For some months hesitation reigned.

Ready for War

It seems clear that key leaders of the northern “developmental coalition” represented by the Republican Party were ready enough for war, provided other people bore most of the costs. As tax historian Charles Adams writes, “The Wall Street boys and the men of commerce and business were determined to preserve the Union for their economic gains”—a calculation made easier for them after the contrasting U.S. and Confederate tariff schedules were released in early 1861.

With the highest tariff rates at 47 percent (North) and 12 percent (South), a massive shift of English and European trade to Norfolk, Charleston, Mobile, and New Orleans seemed likely. U.S. revenues would plummet, and northern business imagined short-run (or longer) catastrophe. A good many more northern businessmen began to calculate the possible benefits of a war. On cue, hesitating newspapers changed their line. Of course access to the Mississippi River (quite unthreatened in reality), the reluctance of any State apparatus to lose territory, and ideological nationalism played their parts.

War came, and Republican economic operators made the most of it. With so many of their former opponents assembled in another Congress in Montgomery (later Richmond), Republican interest groups conducted what historian Ludwell Johnson calls “a war of economic and political aggrandizement.”

To fund and man the actual military struggle, Congress provided numerous excise taxes, inflationary Greenback currency, bond issues (public debt), an unprecedented income tax, tariffs, and mass conscription. Interestingly, most northern enterprisers doing well off the war (like Mellon, Morgan, Armour, and Gould) paid substitutes and never went near a battle. The costs of the war could indeed be shifted. For interests getting vested under cover of the war, there were also tariffs (dual-use, it seems), banking acts, the Homestead Act (1862), the Contract Labor Law (1864), Pacific (and other) subsidized railroad projects complete with land-jobbing, and of course the inevitable rivers and harbors acts. The resulting concentration of capital, active strikebreaking by federal troops in St. Louis and Louisville, and (fairly typical) 50 percent profit rates on U.S. war contracts round out this pretty picture. Transparent loopholes in the Homestead Act ensured that land speculators and mining, timber, and oil companies got far more land than genuine settlers did. In addition, historian Jeffrey Rogers Hummel notes that the Morrill Act of 1862 granted considerable western land to eastern states partly in support of federal military education (more fodder for organized land-jobbers). Intentionally or otherwise, the Fourteenth Amendment (1868) hastened, as historian Arthur A. Ekirch, Jr., writes, “the triumph of national big business under the gospel of the ‘due process clause.’’’

It follows that a minimal definition of laissez faire as understood by Republicans during and after the war would run as follows: open-ended, active federal assistance for connected businesses through tax money, favorable statutes and legal rulings, and other institutional favors, with no corresponding obligation of these businesses toward society or even the State itself. So assisted, businessmen would make big bucks and accumulate capital, thereby greasing the wheels of progress and development. This was all the common good we need ever expect—a cozy arrangement indeed, despite conflicts and divisions already visible within the Republican machinery.

Historian Clyde Wilson notes that for Republicans “the revolution . . . was the point” and finds it odd that scholars fully informed on wartime and postwar corruption “imply that it mysteriously appeared after Lincoln’s death, and somehow miss the obvious conclusion that it was implicit in the goals of the Lincoln war party.” Lincoln’s first secretary of war, Simon Cameron, Pennsylvania iron manufacturer and Republican political boss, oversaw many a dodgy deal. Lincoln himself knew his associates quite well and joked that at least Cameron “wouldn’t steal a red-hot stove.” Small wonder, then, that Ludwell Johnson finds profiteering and fraud “so pervasive that they seemed to be of the very essence of the Northern war effort.”

Johnson sees northern wartime practice with regard to southern property as a policy of “redeeming the South by stealing it.” Under vague doctrines of “war powers” and the like, the administration quickly moved to confiscate “rebel” property forfeited for withdrawal of “allegiance” owed. In occupied Confederate territory the U.S. government created special tax districts whose funny auctions of “abandoned” property attracted insider bidders with advance information. The New England Emigrant Aid Company—a land company previously active in Kansas, doing business under a philanthropic veneer—set its sights on conquered parts of Florida. Here it would make money while sharing the bounty of New England civilization. Edward Atkinson, an antislavery textile manufacturer from Massachusetts, took an interest in the Florida project, writing to a colleague, “If he [the former slave] refused to work, let him starve and exterminate himself if he will, and so remove the negro question—still we must grow cotton.” (As philanthropy this was perhaps a bit narrow.) And cotton was a hot item—confiscated, stolen, or gotten through trade with the enemy, for which Lincoln personally issued the licenses. Out of $30 million worth of cotton seized under an 1863 law only 10 percent actually reached the U.S. Treasury. Another $70 million in cotton was simply “stolen by Republican appointees,” as Wilson notes.

In any case, the war was not inexpensive. Claudia D. Goldin and Frank D. Lewis estimate direct war costs in terms of expenditures, lost wages, and more at $3,365,846,000 for the North and $3,285,900,000 for the South. In Georgia alone General Sherman guessed that of $100 million in property destroyed by his forces, 80 percent was “simple waste and destruction” and not a matter of military necessity. For the South as a whole, estimated wealth fell between 1861 and 1865 by about 40 percent—not counting the value of slave “property.” Hummel gives a figure of 50,000 for civilian deaths in the South, presumably of all races, genders, and conditions. Of southern white males aged 18 to 45, 18-25 percent had been killed.

Reorganized Production

Counting Reconstruction as a political continuation of the war, we may now survey the political-economic structure yielded by the struggle. Here the old debate about whether the war retarded or accelerated American industrialization is of little interest. Mere questions of productivity (or output per square worker) matter less than how production was reorganized and who benefited from any changes. In Hummel’s view the wartime illusion of prosperity and full employment cannot survive the fact that wages fell, in real terms, by one-third. In the end, he concludes, the war retarded real growth; indeed, there was a waste of roughly five years’ accumulation of wealth. War contracts had not made up for lost southern markets.

In this new economy railroads were both cause and effect. Organized as much for land speculation as for transportation, subsidized railroads gave early signs of having far exceeded demand; in other words, railroads represented massive overinvestment. Yet subsidized transportation was the key lever of the post-1865 American economy. William Appleman Williams writes that the demand for railroad regulation was not socialist, but merely applied “[Adam] Smith’s argument against mercantilist joint-stock companies to the railroad corporations of their own time.” Railroads particularly required large-scale bureaucratic organization. The modern corporate form served them well, and their short-run success strengthened the corporate form. As Peter N. Carroll and David W. Noble observe, the railroad corporation “patterned itself on the Union army, the first major public bureaucracy.”

Along with increased corporate organization came concentration of capital reinforced by the details of wartime contracts and favored by the tax structure. No less a libertarian than Roy A. Childs, Jr., wrote in 1971 that “much of the concentration of economic power which was apparent during the 1870s was the result of massive state aid immediately before, during, and after the Civil War. . . .” Further, in the decades after the war, this led, as Willis J. Ballinger noted in 1946, to an imbalance in favor of savings invested in fixed capital (“oversaving”). (This spawned from the 1880s forward much discussion of “oversaving” and “overproduction,” with overseas economic empire as a proposed solution.)

A New Industrial Order

Wartime corruption was only a small part of the story. It is more important that, as Richard F. Kaufman observes, the Civil War brought about a “new industrial order . . . composed largely of war profiteers and others who grew rich on government contracts . . . and . . . were able to influence the economic reconstruction.” Further, important and persisting capitalist fortunes arose from wartime contracts: “J. P. Morgan, Philip Armour, Clement Studebaker, John Wanamaker, Cornelius Vanderbilt, and the du Ponts had all been government contractors. Andrew Carnegie got rich speculating in bridge and rail construction while assistant to the Assistant Secretary of War in charge of military transport.” If there indeed were Robber Barons, they got their start in the war.

There were various tensions in the Republican developmental bloc. Some New Englanders, for example, favored lower tariffs and even dared hope that party regulars might steal a little less at a time. According to historian Williams, the Radical wing stood for inflationary currency, high tariffs, and holding the southern states as “a new frontier” for Yankee enterprise.

In political scientist Richard Franklin Bensel’s view, a Republican-led northern developmental coalition of capitalists, financiers, and farmers successfully imposed a single market and commercial code on the entire American federation through neomercantilist activism. The war saw the emergence of a powerful new class of financiers in New York City. After 1865 much of their money went into railroads as they worked to remove Greenback currency from circulation from 1870 on. Here they broke with the Radical Republicans. Bankers preferred to control any expansion of credit and wanted their loans repaid in dollars of equal or greater value than those they had lent. Deflation suited them. The Republican capitalist-and-farmer alliance may have lasted as long as it did only because a generous and expanding pension program for Union veterans partly offset what Midwestern and western farmers lost through high tariffs. (A qualified veteran typically got about a third of the average workingman’s wages for a year. Here was America’s first major welfare program.)

Historian Gabriel Kolko notes rapid expansion and accumulation of capital from 1871 to 1899. Because of recurring upper-class panics over labor organization, “violence was used in America more than in any other country that bothered preserving the façade of democracy”—and the violence was always disproportionate. The Civil War had stimulated manufacturing, railroad investment and building, and mining. Big enterprises rested on family alliances and nepotism. As a result, Kolko writes, the idea of social consensus “wholly obscures the real basis of authority in the United States society since the Civil War—law and the threat of repression.” Alas for the members of the ruling class, they so successfully broke “the possibility of opposition [that] they also destroyed as well, social cohesion and community.”

In a polemic written in 1937, Texas historian Walter Prescott Webb made a case for the West and South against the North. Railroads, built only in the North between 1860 and 1875, killed off southern river traffic. The North enjoyed major bounties: high tariffs, Union army pensions (seven-eighths of which went to the North—a way of spending the “surplus” raised by high tariffs), northern ownership of most industrial patents, and finally, the modern corporation as such—with 200 majors in 1937, all based in the North. This financial-capitalist “feudalism” was sustained by the Supreme Court’s dogma of corporate personhood (1885, 1886, 1889). Anticipating Bensel’s analysis by 50 years, Webb noted how Union army pensions ($8 billion, all told) compensated the West for what it lost on the tariff.

Historian C. Vann Woodward notes that, ground down by tariffs and northern business control of most patents, the South remained trapped as an exporter of raw materials. Along with the famous freight-rate differential (which lasted into the 1940s), these levers worked as effectively as the British Board of Trade in reducing the southern economy to colonial status. As Hummel writes, national banking rules “stifled recovery of the South’s credit markets.” Nor was there cash in small denominations. Here Hummel fills in some gaps in Woodward’s argument. (On the orientation of banking law toward the convenience and profit of northeastern financiers, Bensel’s Yankee Leviathan account reinforces Hummel’s Emancipating Slaves, Enslaving Free Men.) Further, Hummel notes, southerners were taxed to pay interest on the national debt, nearly all of which went to northern parties and to fund Union army pensions—29 percent of the federal budget by the mid-’70s. Here again was a net outflow northward, while the same southerners paid state taxes for Confederate pensions. Not surprisingly, railroad bonds issued by Republican governments in the South during Reconstruction had been “the occasion of most political fraud below the Mason-Dixon line.”

It can be argued that in the end agriculture always pays for industrialization. Bensel is quite clear: “The [American] developmental engine left the southern periphery to shoulder almost the entire cost of industrialization. . . . The periphery was drained while the core prospered.” This means that independence was a serious economic option whose advantages for the South Bensel briefly discusses. But as historian Eugene D. Genovese writes, “Since abolition occurred under Northern guns and under the program of a victorious, predatory outside bourgeoisie, instead of under internal bourgeois auspices, the colonial bondage of the economy was preserved, but the South’s political independence was lost.”

Under Republican auspices the federal government asserted complete primacy over economic regulation, while advancing a big-business bloc allied to its party. This was in the essential Federalist tradition. “Liberal reform” of the 1870s was partly rooted in bourgeois panic over imaginary Paris Communes about to arise on our shores. One result was attempts in the North to disenfranchise “unreliable” voting blocs of workers and immigrants. Here were the beginnings of “de-participation”—the conscious project of removing the people from popular government in favor of permanent bureaucratic management intended to be both effective and inexpensive. Here was America’s answer to Benthamism. Our troubles did not begin (or end) with the Progressive Era.

“Nowhere was the American rejection of authority more complete than in the political sphere,” writes historian David Donald. “The decline in the powers of the Federal government from the constructive centralism of George Washington’s administration to the feeble vacillation of James Buchanan’s is so familiar as to require no repetition here. . . . The national government, moreover, was not being weakened in order to bolster state governments, for they too were decreasing in power. . . . By the 1850s the authority of all government in America was at a low point.”

The United States, already one of the most prosperous and influential countries on the face of the earth, had practically the smallest, weakest State apparatus.

The great irony of the Civil War is that all that changed at the very moment that abolition triumphed. As the last, great coercive blight on the American landscape, black chattel slavery, was finally extirpated—a triumph that cannot be overrated—the American polity did an about-face.

Insofar as the war was fought to preserve the Union, it was an explicit rejection of the American Revolution. Both the radical abolitionists and the South’s fire-eaters boldly championed different applications of the revolution’s purest principles. Whereas the abolitionists were carrying on the assault against human bondage, the fire-eating secessionists embodied the tradition of self-determination and decentralized government. As a legal recourse, the legitimacy of secession was admittedly debatable. Consistent with the Antifederalist interpretation of the Constitution that had come to dominate antebellum politics, secession undoubtedly contravened the framers’ original intent. But as a revolutionary right, the legitimacy of secession is universal and unconditional. That at least is how the Declaration of Independence reads. “Put simply,” agrees William Appleman Williams, “the cause of the Civil War was the refusal of Lincoln and other northerners to honor the revolutionary right of self-determination—the touchstone of the American Revolution.”

American nationalists, then and now, automatically assume that the Union’s breakup would have been catastrophic. The historian, in particular, “is a camp follower of the successful army,” Donald wrote, and often treats the nation’s current boundaries as etched in stone. But doing so reveals a lack of historical imagination. Consider Canada. The United States twice mounted military expeditions to conquer its neighbor, first during the American Revolution and again during the War of 1812. At other times, including after the Civil War, annexation was under consideration, sometimes to the point of private support for insurgencies similar to those that had helped swallow up Florida and Texas. If any of these ventures had succeeded, historians’ accounts would read as if the unification of Canada and the United States had been fated, and any other outcome inconceivable. In our world, of course, Canada and the United States have endured as separate sovereignties with hardly any untoward consequences. “Suppose Lincoln did save the American Union, did his success in keeping one strong nation where there might have been two weaker ones really entitle him to a claim to greatness?” asks David M. Potter. “Did it really contribute any constructive values for the modern world?”

The common refrain, voiced by Abraham Lincoln himself, that peaceful secession would have constituted a failure for the great American experiment in liberty, was just plain nonsense. “If Northerners . . . had peaceably allowed the seceders to depart,” the conservative London Times correctly replied, “the result might fairly have been quoted as illustrating the advantages of Democracy; but when Republicans put empire above liberty, and resorted to political oppression and war rather than suffer any abatement of national power, it was clear that nature at Washington was precisely the same as nature at St. Petersburg. . . . Democracy broke down, not when the Union ceased to be agreeable to all its constituent States, but when it was upheld, like any other Empire, by force of arms.”

“War is the health of the State,” proclaimed Randolph Bourne, the young Progressive, disillusioned by the Wilson administration’s grotesque excesses during World War I. Bourne’s maxim is true in two respects. During war itself the government swells in size and power, as it taxes, conscripts, regulates, generates inflation, and suppresses civil liberties. Second, after the war there is what economists and historians have identified as a ratchet effect. Postwar retrenchment never returns government to its prewar levels. The State has assumed new functions, taken on new responsibilities, and exercised new prerogatives that continue long after the fighting is over. Both of these phenomena are starkly evident during the Civil War.

Before Fort Sumter national spending was only about $2.50 per person per year, or $50 per person in today’s prices. The central government relied on only two sources of revenue: a very low tariff and the sale of public lands. The war brought not only protectionist import duties but also a vast array of internal excises, the country’s first national income tax, and an extensive internal revenue bureaucracy with 185 districts reaching into every hamlet and town. Federal outlays soared from 1.5 percent of the economy’s output to almost 20 percent, approximately what the central government spends today. The national debt climbed from a modest $65 million, less than annual expenditures, to $2.8 billion. This provided the justification for replacing the antebellum monetary system of free banking and financial deregulation (which some economic historians believe was the best the country has ever had) with inflationary fiat money and nationally regulated banking.

Protectionism would continue to dominate U.S. trade policy mercilessly until the Great Depression and was just one manifestation of the Lincoln administration’s effort to enlist special interests through government subsidies and privileges. The Yankee Leviathan also was responsible for the first federal aid to transcontinental railroads, land grants for higher education, a Department of Agriculture for farmers, and troops to break strikes for employers. The prewar regime of Jacksonian laissez faire was effectively supplanted by Republican neomercantilism, an alliance between business and government that became so scandalous during the Grant era that it has gone down in history as, to use Vernon Louis Parrington’s label for the postwar feeding frenzy, the “Great Barbecue.”

Lincoln’s war delivered a blow to civil liberties as well. The Union’s resort to nationally administered conscription touched off so much resistance that the President suspended habeas corpus throughout the North. Traditional estimates are that the administration imprisoned without trial or charges 14,000 civilians during the conflict, but some historians believe the figure to be much too low. To be sure, the greater number were citizens of either the border states or the Confederacy itself, and many of those arrested secured quick release within a month or two, usually after swearing a loyalty oath. Yet the federal government at the same time monitored and censored both the mails and telegraphs and shut down over 300 newspapers for varying periods.

Many of these measures were of course abandoned at the fighting’s end. Federal spending fell from its wartime peak to only 3 to 4 percent of GDP. Although not a trivial decline, it still left spending at twice prewar levels, and the largest postwar expenditures were war-related. Interest on the war debt initially accounted for 40 percent of federal outlays, and by 1884 veterans’ benefits were consuming 30 percent. These benefits were so lavish that they constitute the national government’s first old-age and disability insurance and stand as a precursor to Social Security. The impact of the Civil War was even felt in the seemingly unrelated area of obscenity. Congress passed the first act regulating mail content in response to complaints that troops were ordering pornographic material, and this became the basis for the Comstock witch hunts of the 1870s.

The Real Turning Point

This ratchet effect is a phenomenon historians frequently observe. Yet the Civil War did something more. Despite wars and their ratchets, governments must sometimes recede in reach, else all would have been groaning under totalitarian regimes long ago. Both conservatives and so-called liberals date the major political turning point in American history at the Great Depression of 1929. Previously Americans are supposed to have self-reliantly resisted the temptations of government largess and confined federal power within strict constitutional limits. Although Franklin D. Roosevelt’s New Deal is responsible for Social Security, which along with health care, now ranks as the national government’s primary expense, this legend ignores several inconvenient facts. To begin with, the New Deal simply emulated the Wilson administration’s previous war collectivism. Moreover the growth of government under the New Deal was trivial compared to its growth during the United States’ next major conflict: World War II.

More astute analysts push the watershed in U.S. history back to the Progressive Era. Progressivism emerged at the beginning of the twentieth century as a diverse inclination, varying in different parts of the country and including members of all political parties. But it became the country’s first dominant mindset to advocate government intervention in the free market and in personal liberty at every level and in every sphere. My contention, however, is that America’s decisive transition must be dated even earlier.

The Yankee Leviathan co-opted and transformed abolitionism. It shattered the prewar congruence among anti-slavery, anti-government, and anti-war radicalism. It permanently reversed the implicit constitutional settlement that had made the central and state governments revenue-independent. It acquired for central authority such new functions as subsidizing privileged businesses, managing the currency, providing welfare to veterans, and protecting the nation’s “morals”—at the very moment that local and state governments were also expanding. And it set dangerous precedents with respect to taxes, fiat money, conscription, and the suppression of dissent.

These and the countless other changes mark the Civil War as America’s real turning point. In the years ahead, coercive authority would wax and wane with year-to-year circumstances, but the long-term trend would be unmistakable. Henceforth there would be few major victories of Liberty over Power. In contrast to the whittling away of government that had preceded Fort Sumter, the United States had commenced its halting but inexorable march toward the welfare-warfare State of today.