My family’s number was TI3-8597. The letters were meant to honor a man I never knew of or appreciated until long after the switch to all digits—Samuel J. Tilden. He deserves to be much better remembered as something other than part of a defunct phone number. A strong case can be made that he was, as the subtitle of a recent book by screenwriter Nikki Oldaker suggests, “The Real 19th President.”

Tilden was born nearly two centuries ago on February 9, 1814, in New Lebanon, New York. After studies at Yale and New York University, he became a successful lawyer, a shrewd investor, a wealthy man, and a promising politician in the Democratic Party. A crusader against the corruption of the infamous Tammany Hall political machine in New York City, Tilden was catapulted from the New York state assembly to the governorship in 1874. From that perch he quickly earned a national following and gained the Democratic Party’s nomination for president in 1876.

No Democrat had occupied the White House since James Buchanan passed the office to Abraham Lincoln in 1861. Fifteen years later the country was ready for a change. Tilden comfortably beat Ohio Republican Rutherford B. Hayes in the popular vote, 51 to 47.9 percent, but a nasty political battle resulted in a dubious deal. Behind closed doors Hayes was awarded enough disputed votes in the Electoral College to edge Tilden there by one vote. In exchange the Republicans agreed to withdraw federal troops from the South and end Reconstruction. Tilden remains one of only four presidential candidates in U.S. history to win the popular vote but lose the Electoral tally—the others being Andrew Jackson (1824), Grover Cleveland (1888), and Al Gore (2000).

Tilden was known for assessing policy options according to right and wrong versus the typical political (and Machiavellian) rule of what can get you elected and reelected. “Successful wrong never appears so triumphant as on the very eve of its fall,” he once said. “We must believe in the right and in the future. A great and noble nation will not sever its political from its moral life.”

Hayes turned out to be a clean and decent one-term president, but Tilden just might have shined as one of our best. I’ve come to admire him because he was rigorously committed to all the right things: limited government, sound money, free trade, and low taxes—which is to say that he’d have a hard time getting to first base today, particularly within his own party. Most 21st-century libertarians would be very comfortable with the 1876 Democratic Party platform on which Tilden ran.

Money. The big money questions of the 1870s were 1) what to do with the hundreds of millions of paper dollars (“greenbacks”) issued during the Civil War; and 2) whether to subsidize and re-monetize silver as a means of inflating the currency. Tilden and the Democrats were the country’s leading advocates of fulfilling the original promise to redeem greenbacks in gold and in opposing subsidies for silver. As advocates of sound money they had no interest in monetary expansion to goose the economy and help debtors because they believed it was fundamentally dishonest.

“Reform is necessary,” asserted the Tilden platform, “to establish a sound currency, restore the public credit, and maintain the national honor. We denounce the failure for all these eleven years of peace to make good the promise of the legal tender notes (the greenbacks), which are a changing standard of value in the hands of the people, and the non-payment of which is a disregard of the plighted faith of the nation.” Taking direct aim at the Republicans, it went on to declare: “We denounce the financial imbecility and immorality of that party which . . . has made no advance towards resumption—no preparation for resumption—but instead has obstructed resumption by wasting our resources and exhausting all our surplus income.”

Tariffs: Taxes on imported goods were the primary source of federal revenue for most of the nineteenth century. Since Lincoln, the Republican Party stood for high tariffs not just for the revenue but also for the “protection” of domestic industries. The free-trade Democrats saw protectionism for what it really is: an attack on consumers for the benefit of producers with political connections. The Tilden platform’s critique of it is as relevant today as it was in 1876:

We denounce the present tariff, levied upon nearly four thousand articles, as a masterpiece of injustice, inequality, and false pretence. It yields a dwindling, not a yearly rising, revenue. It has impoverished many industries to subsidize a few. It prohibits imports that might purchase the products of American labor. It has degraded American commerce from the first to an inferior rank on the high seas. It has cut down the sales of American manufactures at home and abroad, and depleted the returns of American agriculture—an industry followed by half our people. It costs the people five times more than it produces to the treasury, obstructs the processes of production, and wastes the fruits of labor. It promotes fraud, fosters smuggling, enriches dishonest officials, and bankrupts honest merchants. We demand that all custom-house taxation shall be only for revenue.

Government spending: Virtual one-party (Republican) dominance since 1865 had produced huge increases in federal expenditures, largely for pork-barrel projects. Tilden denounced the spending explosion, and his people inserted strong language against it in the 1876 platform: “Since the peace, the people have paid to their tax-gatherers more than thrice the sum of the national debt, and more than twice that sum for the federal government alone. We demand a rigorous frugality in every department, and from every officer of the government.” The Tilden Democrats were squarely in the tradition of their Jefferson-Jackson forebears and light-years apart from their Democratic descendants of today. It was a tradition that would continue through the last great Democratic president, Grover Cleveland, only to be thoroughly forsaken by the next (and arguably the worst) Democratic president, Woodrow Wilson.

On many other vital issues of the day Tilden and the Democrats staked out the moral high ground. They opposed an imperialistic foreign policy and favored Civil Service reform to minimize political patronage and corruption. Because they respected the rights and sovereignty of free individuals, they fought against sumptuary laws to regulate personal behavior. They denounced the use of government power to advantage one group over another. And they pushed to treat the southern states once again as equal partners in the Union.

Today dozens of streets, townships, libraries, and schools from Wichita Falls, Texas, to Washington, D.C., bear the Tilden name. A statue of him and his home, both in New York City, still stand. But otherwise, sadly, the memory of this man who stood for liberty and should have been president is fading as surely as my old phone number.

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.

It is true that the U.S. government imposed relatively heavy tariffs on American purchases of foreign-made goods throughout the nineteenth century. After steadily falling throughout the 1830s, 1840s, and 1850s, tariff rates began to rise again in the 1860s. A pinnacle of sorts was reached with the McKinley Tariff of 1890, which imposed what were then the steepest tariff rates in U.S. history.

It is also true that the nineteenth century was one of steady industrialization and great economic growth. According to Nobel laureate economic historian Douglass North, in 1820 America’s agricultural workforce was nearly seven times larger than her nonagricultural workforce. By the late 1890s, however, the number of nonagricultural workers surpassed the number of Americans working on farms.

And real per-capita income also rose steadily during this time. In 1900 it was about three times higher than it was in 1840.

Was this industrialization and significant improvement in Americans’ incomes the consequence of high tariffs? Or at least can we say that high tariffs did no harm to America’s economy during the 1800s?

No and no.

Facts on other fronts undermine protectionists’ claims that the nineteenth-century experience with high tariffs was positive.

Begin by noting that throughout the 1800s tariff revenues were a major source of operating funds for Uncle Sam. But tariffs that could significantly reduce imports would also reduce government revenues. After all, the very purpose of a “protective tariff”—as opposed to that of a “revenue tariff”—is to dramatically decrease the occurrence of the thing being taxed: imports. (In the extreme case, even a very high tariff rate on imports yields no government revenue if that rate causes Americans to stop importing completely.)

Because sustained budget deficits were practically out of the question in the nineteenth century, genuine protective tariffs arguably kept government in general smaller than it would otherwise have been by keeping revenues lower than they would have been under revenue (rather than protective) tariffs.

Smaller government, in turn, meant less intrusion into the economy. The resulting freedom of entrepreneurs and consumers, and lower likelihood of government handouts (and bailouts!) to favored interest groups, promoted healthy economic growth.

More generally, except for high tariffs, the U.S. economy of the nineteenth century was relatively free. Labor unions enjoyed no special legislative protections; outright industrial and agricultural subsidies were rare; nontariff taxes were either low or nonexistent; antitrust obstructionism wasn’t even possible until 1890, with the passage of the Sherman Act (and even then, it was largely held in check by the courts for a few more years); and there was no SEC, FDA, FTC, EPA, or any of the other alphabet-soup bureaucracies that haunt the economy today. (The first such agency—the Interstate Commerce Commission—wasn’t created until 1887.)

Real Growth Factors

Low taxes and minimal regulation paved the way for entrepreneurs to create, investors to invest, and consumers to reap the resulting benefits. America’s economic growth in the nineteenth century owed a great deal to this freedom.

One particular unregulated feature of the economy was immigration. Substantial immigration, especially during the last few decades of the 1800s, infused the American economy with productive human power and creativity. This immigration also expanded the size of the market able to be served by domestic firms, permitting these firms to take advantage of economies of scale that would otherwise have been unavailable to them because of restrictions on trade with foreign markets.

Economists Cecil Bohanon and T. Norman Van Cott reported, in a 2005 paper published in The Independent Review, that America’s policy of open immigration went a long way toward minimizing the harmful effects of high tariffs.

In addition to the immigrant-fed growth of the U.S. population in the nineteenth century, there was the growth of U.S. geography. By the end of the nineteenth century, the United States stretched from the Atlantic to the Pacific, and from Canada to Mexico and the Gulf. This enormous geographic area was a free-trade zone. Consumers and producers in frigid New England could specialize and trade with producers and consumers in sunny Florida and even faraway California.

The different geographic features that are among the reasons why trade among different small countries is so beneficial were present within this one sprawling and geographically diverse country.

Home of the Free(-Trade Zone)

So America’s impressive economic growth during the nineteenth century was in fact the result of free trade—trade unhampered within the expansive boundaries of a country that was huge, growing, and diverse in both its geography and its population.

If the protectionist logic was correct, then even greater wealth—or at least as much—would have been produced had each U.S. state adopted its own policy of protecting in-state producers from out-of-state competitors. But I know of no serious scholar who laments the fact that the United States, from its origins, has truly been a zone of free trade.

Of course, the fact that America’s economy grew impressively during the 1800s despite Uncle Sam’s restrictions on foreign trade does not mean that these restrictions weren’t harmful. They no doubt were. The restrictions stopped specialization from going ever further; they diminished the intensity of competition from the levels that consumers would have enjoyed without high tariffs; and they hampered the ability of American producers and consumers to tap into the creativity of non-Americans who did not immigrate to America.

Fortunately, though—or is it unfortunately?—nineteenth-century America’s other advantages were so great that the bounty they made possible blinds many people to the harm caused by that era’s high tariffs.

As an example of the latter, consider radio host and writer Lou Dobbs, who dismissed concern for consumers in his book Exporting America, where he wrote, “I don’t think helping consumers save a few cents on trinkets and T-shirts is worth the loss of American jobs.” Similarly, then-Senator Barack Obama told a stadium filled with cheering union members in 2007 that “people don’t want a cheaper T-shirt if they’re losing a job in the process.” The idea here is that desire of consumers to save money should be trumped by the supposed need to “save jobs.”

Griswold points out that politicians generally favor “the noisy producer interests over the silent, suffering consumer” and reminds the reader that life itself depends on consumption. To that end, he quotes Adam Smith in The Wealth of Nations:

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promotion of the consumer. The maxim is so perfectly self-evident that it would be absurd to prove it. But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production and not consumption, as the ultimate end and object of all industry and commerce.

The problem, of course, is that there is usually political advantage in running a “mercantile system” that benefits some domestic producers at the expense of consumers—and other producers who need the “protected” goods to make their own products.

Griswold’s tour de force explores and documents the many ways in which import competition benefits American consumers, enabling them to improve their standard of living with a greater range of choice, lower real prices, and better quality. Those are not insignificant benefits. When the likes of Dobbs and Obama ridicule free trade as merely a matter of saving a small amount on T-shirts and trinkets, they’re giving a deliberately distorted picture of reality.

Big-box retailers, such as Walmart, Home Depot, and Best Buy, that purchase much of their inventory from overseas producers and ship it to stores in the United States, managed to hold their sales fairly steady or even increase them during the current recession. But what was good for those chains and their customers was sour news for organized labor. Unions often demand a “level playing field” and claim that foreign producers enjoy various “unfair advantages” such as a lower wage scale and export subsidies. When they call for tariffs, they say they don’t want special favors but only “fairness.”

Our author begs to differ. He explains to readers David Ricardo’s 1817 insight about comparative advantage—that each nation (or better still, each person or firm) will tend to discover where it has comparatively lower costs and then concentrate on producing those goods. Whether a producer’s cost advantage is “fair” or “unfair,” the best policy, Griswold argues, is for the government not to interfere with trade. Instead of further building up trade barriers, as various special interests advocate, he urges that we drop the barriers that separate us from the peaceful global marketplace.

But what about American manufacturing? Won’t free trade reduce us to a “service economy” consisting of mostly low-paying jobs? Politicians and pundits have been saying that for years, but Griswold replies that it isn’t true. The number of Americans working in manufacturing has indeed fallen, but that is due more to increases in productive efficiency than to “unfair competition.” While protectionists like North Dakota Senator Byron Dorgan wring their hands over the demise of some household name products like Huffy bicycles and Swingline staplers, they neglect to mention that American manufacturing has significantly increased in real terms since 1970.

Furthermore, Griswold explains that the U.S. government is responsible for a huge “swindle” of consumers—our Harmonized Tariff Schedule, filling nearly 3,000 pages. Our sugar tariff, for example, compels Americans to pay two to three times the world price for sugar. In turn, that has caused American food producers to shift production to Mexico or Canada to escape the cost. Protectionist politicians never mention the flip side of their “save jobs!” coin.

The book’s closing paragraph states: “Free trade unites us with other people in an ever-widening ‘community of work’ that provides a powerful alternative to conflict and war.” I strongly recommend Mad About Trade.

The strength of the anti-globalist coalition has waxed and waned over time, but there is still a large number of people who believe that globalization is a sinister force that must be stopped at any cost. In Why Globalization Works, Martin Wolf does a fine job in showing why free trade ensures that the world’s economies continue to grow.

Wolf is the economics columnist for the Financial Times; he is the most libertarian voice in a newspaper well known for its stubborn hostility to classical liberalism. But in the 1970s, before he became a journalist, Wolf was an economist for the World Bank, where he saw firsthand how the bank’s lending for failed Third World planning schemes left some of the world’s poorest nations more destitute and debt-ridden then they were before the bank began to “help” them. This led Wolf to see that free trade is the best way to make sure that Third World countries are transformed from passive recipients of international aid to productive participants in the global economy.

Wolf is at his best when he refutes the facile claims of the foes of globalization. Among the charges he addresses:

• Corporations rule the world and force us to buy things we don’t want. In her 2001 book, No Logo, Canadian anti-globalist Naomi Klein explains that her hostility towards capitalism began in fourth grade, where “my friends and I spent a lot of time checking each other’s butts for logos. . . . [W]e were only eight years old but the reign of logo terror had begun.”

“In the last century,” Wolf notes, “millions of human beings knew the terror of police states, genocide, and government-engineered famines. But insists Klein, I and people like me have experienced terror too. We are not just the world’s most pampered brats. We know terror too: ‘logo terror.’ ” Wolf then shows that all the evidence suggests that consumers are less and less likely to buy products solely based on a brand name. And corporations, unlike governments, have no police or tax-collection agencies to confiscate people’s incomes.

• Under globalization, the Third World gets all the manufacturing jobs. An average Chinese worker may earn $750 a year while a German earns $35,000 and an American $29,000. But Americans and Germans are far more productive than Chinese workers are. This productivity advantage ensures that skilled workers in American factories earn their high salaries—and explains why makers of complex products such as airplanes or drugs are unlikely to move production overseas.

• Globalization has increased inequality among nations. In fact, Wolf argues, the reverse is true. Freer markets in China and India have resulted in dramatic increases in income levels in those two nations in the past decade, ensuring that hundreds of millions of Chinese and Indians are leading better lives. Incomes in these two countries are nowhere near Western levels, but what matters more is that capitalism has made sure that the average worker is doing far better than he did under the draconian governments of Mao Zedong or Indira Gandhi.

Moreover, international companies do not make investments in the Third World randomly. They invest in countries that believe in the rule of law—where private property is supported, contracts can be enforced by an independent judiciary, and an educated labor force is available. If far too many African nations are stagnating, it’s not because of stinginess by multinational corporations, but because these countries are ruled by strongmen who plunder their countries and leave them as economic basket cases.

Wolf does not reflexively condemn all the anti-globalizers’ arguments. In particular, he says that the charge that rich countries are hypocrites for asking poor countries to open their markets while preserving trade barriers is “more than justified.” He notes that while global tariffs currently average 3 percent, agricultural tariffs are a more-punitive 13 percent—and most of these tariffs hurt the Third World. A Progressive Policy Institute study, for example, showed that in 2001 the United States charged Bangladesh $331 million in tariffs—about the same as France. The result: the tariffs punished Bangladeshi farmers trying to better their lives. Farm subsidies, antidumping measures, and environmental regulations are also frequently used by Americans, Europeans, and Japanese to keep foreign goods out. Those barriers, Wolf believes, should be greatly reduced or eliminated.

Martin Wolf is a sharp and lucid writer. Those interested in deepening their knowledge of the world’s economy will find that Why Globalization Works is well worth the time and money.

Bastiat’s definition of socialism, i.e., using the law to take money from some people and give it to other people, could more accurately be translated today as “the welfare state.” Even so, I’ll stick with his term— socialism. And he believed that the idea behind tariffs and other restrictions against free trade was the keystone that supported the legal plunder he saw all about him. He was convinced that if tariffs were abolished, the other elements of socialism would begin to collapse.

He was probably right. For if there were no restrictions against foreign competition— i.e., if foreign goods and capital were treated exactly like domestic goods and capital—the fearful cost we are paying for the other economic compulsions and prohibitions by government would be easily observed by everyone, and would thus soon fall.

Among the several “story examples” offered by Bastiat to expose the fallacy of improving the domestic economy by restricting foreign imports, his allegory on prohibiting Belgian iron from entering France is a classic. He begins by following the thoughts and actions of just one French producer of iron. A century and a third after he wrote it, his story reads as though the essence of it were adopted from today’s Congressional Record or from the editorial pages of any one of hundreds of our daily newspapers.

Our French protectionist was well aware that Belgian mine owners were able to produce and ship iron into France at less cost than he and other French mine owners could produce it and sell it at home. That fact was naturally reflected in the comparatively low price of Belgian iron in French markets. And just as naturally, the French people bought most of their iron from Belgian producers instead of from their own domestic producers. That fact displeased the French mine owners exceedingly, and the one we are here discussing decided to do something about it.

At first, he considered the possibility of personally stopping that undesirable trade. He thought that he might take his gun, sally forth to the frontier, and kill the nailmakers, locksmiths, and other users of iron who crossed the border into Belgium to patronize his competitors. That would teach them a lesson!

But, unfortunately, there was the possibility that those buyers of Belgian iron might object to being killed, and kill him instead. Moreover, he knew that he would have to hire men to guard the entire frontier to make his plan effective. That would cost more money than he had. So our hero was about to resign himself to freedom, when suddenly he had a brilliant idea.

He remembered that at Paris there is a large factory engaged in producing laws. He knew that everyone in France is forced to obey the laws, even the bad ones. So all he needed from the Parisian law-factory was just one small law: Belgian iron is prohibited.

Then, instead of having to guard the frontier with his own few employees, the government would send 20,000 guards — chosen from the sons of the very locksmiths and enginemakers who were carrying on this undesirable trade with the Belgians. Better still, the domestic mine owner himself wouldn’t even have to pay the wages of those guards. That money would be taken from the French people in general, much of it from the self-same buyers of Belgian iron. Our hero could then sell his iron at his own price.

With this ingenious plan, our French mine owner proceeded to the law-factory in Paris. (“At some other time,” interjected Bastiat, who was himself a deputy, “I may tell you of his underhand methods, but here I wish to speak only of what was divulged to the public”)

The protectionist ironmaker urged the authorities of the law-factory to consider the following argument: “Belgian iron sells in France for 10 francs per hundred pounds. But I would prefer to sell it for 15 francs. Now if you will only produce a law that says, Belgian iron shall no longer enter France, the following wonderful results will occur. For each hundred pounds of iron that I sell to the public, I shall receive 15 francs instead of 10 francs. As a result, I can expand my business and employ more workers. My workers and I will have more money to spend. This will help the tradesmen in our community. The tradesmen will, in turn, then also buy more goods. That will mean larger orders to their suppliers all over France. Those suppliers, in turn, will also expand their businesses and hire more workers. Thus employment and prosperity will increase throughout France. All this will result from that extra five francs that your law will permit me to charge.”

The producers of the laws in the law-factory were charmed indeed by the logic of our hero. They rushed to produce the requested law. “Why talk of hard work and economy,” they said, “and why use an unpleasant way to increase the wealth of our nation when a single law can do the same thing.”

Familiar Argument

That argument for protection from foreign competition is precisely (word for word) the argument advanced today in Congress and the media in general to support restrictions against Japanese automobiles, Brazilian shoes, Swedish steel, Argentine beef, and Chinese textiles. And, again, that’s the reason Bastiat’s works are as readable today as they were in 1850; he was dealing with ever-present and universal problems.

“OK,” you may observe, “but you’ve got to admit that protectionism works, just as Bastiat’s fictional mine owner claimed. When the owners of the protected industries spend their profits, it does indeed create more jobs. Unrestricted foreign competition would simply wipe out all those jobs and profits. So what’s wrong with the French mine owner’s argument, if anything?”

Bastiat offered an answer to that question when his fellow-legislators advanced it in the 1800s.

Now in all fairness, we must do justice to the arguments of this mine owner who wanted a tariff to increase domestic employment. His reasoning was not entirely false, but rather incomplete. In securing from the government a special privilege, he had correctly pointed out certain results that can be seen. But he completely ignored certain other effects that cannot be seen.

True enough, the five-franc piece thus directed by law into the cash-box of the domestic producer does serve to stimulate the economy along the lines he predicted. That can easily be seen. But what is not seen is this: That five-franc piece comes, not from the moon, but from the pocket of some French citizen who must now pay 15 francs for the thing that cost him only 10 francs in a free market. And while the protected industrialist may well use the five francs to encourage national industry, the French citizen himself would also have used it for the same purpose, if he had been left free to do so. He would have used his five francs to buy a book, or shoes, or some other article or service he wanted. In either case, national industry as a whole would be stimulated by the same amount.

Thus the new tariff law has resulted in this: The protected industry now makes a high profit to which it is not justly entitled. The average French citizen has been duped out of five francs by his government, and must therefore do without the article or service he would have bought with it. One segment of the economy has profited at the expense of many others. True enough, because of the artificial price increases, new jobs have been created in the protected industry. But what is not seen is the fact that the extra money now spent for iron must necessarily result in reduced spending for other products and services, and thus fewer jobs in those industries. And worst of all, the people have been encouraged to think that robbery is moral if it is legal.

A popular argument today (one that Bastiat never heard) is that those five francs spent by the owners would actually be more productive than the same amount spent by U.S. consumers. The economists who support that argument assume that efficiency under “protected prices” will remain the same as under competition, and that the promised profits will be there as specified, and that those profits will be spent on new equipment, e.g., the United States Steel Corporation will actually use its government-created profits to modernize its facilities and not use them to buy an existing oil company. For the most part, however, reality simply doesn’t work out in harmony with that theory that’s still supported by so many of our leading economists.

As Bastiat said, all tariffs result in a net loss to the national economy and to the people in general. He demonstrates this net loss (both in products and satisfaction) in one of his stories on “compensatory tariffs,” i.e., retaliation against foreigners when they have an advantage (natural or artificial) that’s not possessed by our own producers. He was referring to cheaper labor costs abroad, subsidies and tax concessions given to native producers by their governments, and other advantages that foreign producers are said to have over domestic producers.

A poor peasant in France had planted a few grape vines of his own. After much sweat and time, he harvested enough grapes to make a cask of wine. “I shall sell this wine,” he said to his wife, “and buy enough material to enable you to make a trousseau for our daughter.”

Our honest peasant took his cask of wine to the nearest town. There he met an Englishman and a Belgian, and began to bargain with them about exchanging his wine for cloth.

The Belgian said, “Give me your wine, and I will supply you with 15 parcels of the material you want.”

Then the Englishman entered the bargaining with this offer, “Since we English can manufacture cloth at less cost than the Belgians, I will give you 20 parcels for your cask of wine.”

The peasant was about to sell to the Englishman when a customhouse official, who had heard the conversation, spoke to the wine owner, “My friend,” he said, “trade with the Belgian if you wish, but I have orders to stop you from trading with the Englishman.”

The astounded countryman exclaimed, “What! You wish me to be content with 15 parcels of material that come from Brussels when I can get 20 parcels that come from Manchester?”

The customhouse official answered, “Certainly, don’t you understand that France would suffer if you receive 20 parcels instead of 15?”

The peasant didn’t understand it at all, and said so in no uncertain terms.

Replied the customhouse official, “Well, I’m sorry I can’t explain it, but there is no doubt that it’s true. You see, all our government officials and journalists have agreed that the more a nation receives in exchange for its products, the more it is impoverished.”

Thus because of the protective French tariff against low-cost English textiles, the peasant got just as good a bargain by exchanging his wine for high-cost Belgian textiles. As a result, his daughter got only three-fourths of her trousseau. And those unsophisticated countrymen are still wondering to this day how it happens that a person is ruined by receiving four yards of cloth instead of three. They still don’t understand why a person with nine towels is richer than a person with 12.

A Modern Application

I sometimes suggest to my students in international marketing that the use of compensatory tariffs by the European Common Market today gives precisely the same result that Bastiat pointed out in his story, i.e., tariffs cause higher prices and a decrease in products and services always. The students seem to understand the idea better when I put the transaction in story form, a la Bastiat.

“Take wheat, for example,” I begin. “And let’s follow the American owner as he enters a European port with a shipload of wheat grown in Kansas. The American owner wants to sell his wheat for, say, $3 a bushel. But the officials in the European Economic Community refuse to accept that low price and insist that the European purchasers must pay a much higher price.”

At that, my students begin to look at me strangely. “You mean the European people insist on paying more for the wheat to bake their daily bread than they need to?”

“That’s right,” I answer. And in spite of their doubting expressions, I continue with my story.

“You see, while the Europeans believe in competition, it must be fair competition. And those vast wheat lands in Kansas are just better suited to grow wheat than are the small European farms. So it’s not fair competition—obviously. Further, those Kansas farmers have another big advantage, i.e., vast amounts of capital (farm machinery) that’s just not available to European farmers. The result is unfair competition, i.e., the costs of production for many wheat farmers in Europe are perhaps twice as high as in Kansas. And while most Europeans claim to favor the free market economy and open competition, naturally it must be fair competition. Everybody is in favor of competition, as long as it’s fair. And since fair competition is obviously impossible when the Americans enjoy those two big advantages, tariffs must be used to equalize the situation. Fair’s fair, you know.

“First, the EEC officials check around Europe to find the cost of producing a bushel of wheat by the most inefficient wheat producer in all of Europe. The chances are that’ll be a French farmer who insists on growing grain on his land when the market says grapes or vegetables.

“Once the costs of this most inefficient wheat farmer in all of Europe are determined, then the compensatory tariff to wipe out the American production-advantage is set so that European consumers will find little or no advantage in buying American wheat over French wheat. The price to them will be about the same.

“That’s what most people seem to mean by ‘equal competition,’ i.e., tariffs to wipe out any advantage (natural or man-made) enjoyed by the foreign producer over the domestic producer. The result is that the Europeans must pay perhaps 100 percent more for their daily bread than would be necessary under free trade. And since there are always low-cost producers in any industry, those European wheat farmers who are more efficient than that marginal French wheat farmer just automatically reap high profits—while the people in general have less bread and other goods and services.”

Paying More Is Good?

By now, the students are horrified, of course. It’s just inconceivable to them that any people are so gullible as to pay twice as much as they need to pay for products and services. Then, to give them an even worse example, I take them to Japan and the “orange situation.” I explain that the Japanese insist on paying perhaps four times as much for their inferior domestic oranges as they need to pay for superior California oranges. We Americans have been trying for years to sell our excellent oranges to them at exceedingly low prices. The Japanese refuse to let us do it, however, and continue to insist that they’re better off when they pay three and four times as much as we are willing to charge.

At that point, some of my students become so angry at this “Japanese inscrutability” that they seem almost willing to go to war again to straighten those people out. You doubtless have guessed what I do next — I bring them back home and point out that we Americans insist on forcing ourselves to pay at least 50 percent more for an American car than the Japanese are willing to charge us for a similar or better car.

A chill settles over the classroom. The students who’ve been deriding those inscrutable Japanese are suddenly quiet. Then I begin to hear the all-too-familiar arguments you hear every day in Congress and read every day in your local newspaper—precisely the same arguments Bastiat heard as a member in the French Chamber of Deputies in 1848. “But we must protect American jobs. Those Japanese have the advantage of efficient and disciplined labor. It’s a part of their culture, and it’s obviously not fair. We Americans truly believe in the free market, of course, and competition. But the competition must be fair.” And so on and so on.

Truly, most of us Americans honestly believe that a nation prospers by paying more and getting less. Were that not so, tariffs and all other restrictions against peaceful people freely exchanging their goods and services would disappear immediately. We blind ourselves to reality by concentrating on the producers and their problems instead of on us consumers and our problems. We worry about who produces, instead of what is produced and at what price. We just don’t seem to understand that a nation and its people are better off when we get more for our money, i.e., when we have more products and services, not less.

I now understand what Bastiat meant when he observed that logic is not in any way related to laws that (in various ways) take money from people who have earned it and give it to people who have not earned it. According to Bastiat, that process is the mainspring of socialism, and it’s a sure way to the destruction of both the producers and the consumers in any nation.

Given the euphoria over ethanol, it is hard to imagine that there could be a downside. Unfortunately, ethanol has numerous and significant problems.

For starters, ethanol is an inferior energy source. Ethanol has 35 percent less energy by volume than regular unleaded gasoline. One gallon of E-10 gasoline (which contains 10 percent ethanol) is 3.6 percent less efficient than pure gasoline (ethanol-free, E-0). In other words, as the percentage of ethanol in a gallon of gas goes up, the realized miles per gallon go down. As a result, E-15 is 5 percent less efficient than E-0 gasoline and E-20 is 7.7 percent less efficient. E-85 gas is between 25 and 30 percent less efficient than pure E-0 gasoline.

On average, E-10 gas is 10 cents per gallon cheaper at the pump than regular E-0 gas. E-85 is even cheaper—70 cents per gallon less. This cost-per-gallon comparison is, unfortunately, very deceptive. A more telling measure would be to compare the cost per mile driven for each fuel type. Craig Clough notes that a “flex-fuel” 2007 Chevy Tahoe (capable of handling any ethanol-blend fuel) averages 14 MPG on regular E-0 gas and 10 MPG on E-85 gas. What would it cost to go on a thousand-mile trip using these two different types of gas? The cost of the trip using regular E-0 gasoline (at $3.70 per gallon) would be $264.29. Using the cheaper E-85 gas (at $3 per gallon), the same thousand-mile trip would cost $300—that’s $35.71, or 13.5 percent, more. Translation: Because of the lower energy content in ethanol, consumers actually pay more because they will need more gallons to go the same distance. So if a gallon of ethanol burns cleaner than a gallon of regular E-0 gasoline, but you need to burn more gallons of the ethanol-blended gasoline to go the same distance, how does this result in less pollution? Or does it? Ethanol has another pollution problem. It is more volatile than gasoline (meaning it evaporates far more rapidly), making it a major contributor to smog.

Ethanol also has some nasty properties that politicians and the Big Corn lobby would rather not talk about. For starters, ethanol is corrosive to some metals, rubber, fiberglass, and plastic. This leads to higher maintenance costs and the need to replace parts sooner than would otherwise be the case. Older car engines, boat engines, motorcycles, snowmobiles, and small gas-powered tools (chain saws, snow blowers, lawn mowers, and weed whackers) are especially vulnerable to ethanol corrosion. Fine particles of rubber, plastic, or metal flow through the fuel system. These particles eventually clog the engine’s fuel lines, fuel filter, carburetor, and fuel injector. Ethanol can also cause an engine to burn out because it runs hotter.

Later-model cars and trucks were supposed to have been re-engineered to mitigate the corrosive properties of the E-10 ethanol-laced fuel. Ed Wallace, writing in Business Week, finds that this is not necessarily true. “Not only is ethanol proving to be a dud as a fuel substitute, but there is increasing evidence that it is destroying engines in large numbers.” He goes on: “It now appears that in just a few years since the government forced ethanol use on the country, engine and fuel system failures caused by ethanol are causing major damage to more and more new and used vehicles.” Wallace concludes: “Sadly, when a truly bad idea is exposed today, Washington’s answer is to double-down on the bet, mandate more of the same, and make the problem worse. Only this time around motorists will be able to gauge the real cost of ethanol when it comes time to fix their personal cars.”

Ethanol has two other properties that further complicate the process. Ethanol and gasoline do not bond chemically. They simply coexist in the fuel system in an “oil and vinegar” relationship. While ethanol may hate gasoline, it loves water. The term to describe this is “hygroscopic,” or “water soluble.” Ethanol attracts and absorbs water. As long as the amount of water in the fuel system is small, this can be a good thing: In the winter it limits the possibility of a fuel line freeze-up. However, as the water content gets higher, the new ethanol/water compound sinks to the bottom of the fuel tank. This process is called “phase separation.”

If we continually drive our cars (or cut our grass every week or so) these ethanol-unique characteristics will not normally be an issue. But after about 90 days (the shelf life of E-10 gasoline), problems begin to manifest. The result: “bad gas.” The engine won’t start or there will be “missing” or “sputtering” problems. This is the reason you don’t want to leave gas containing ethanol in the lawn mower over the winter.

Because of the separation and corrosion problems, ethanol cannot be transported through pipelines. It requires its own separate and costly distribution channel dominated by rail and trucks to keep it apart from the gasoline as long as possible before retail.

Unconscionable Burning of Food

Ethanol’s biggest problem is largely ignored. Burning food as an energy source is unconscionable in these circumstances. Using corn to feed humans and livestock, and to fuel cars, is having obvious negative implications. In 2007 we burned 15 percent of our corn crop as ethanol. According to the Investor’s Business Daily (IBD), “Ethanol and its subsidies amount to a hidden and nefarious tax on food. The higher use of ethanol accounted for up to 15 percent of the rise in food prices between April 2007 and April 2008.” Congressional mandates to increase the use of ethanol even more will only exacerbate this problem. To meet the massive artificial demand for corn created by this government energy program, we can either: 1) switch crops (soy to corn) and keep the cropland acreage the same (which will cause all food prices to skyrocket) or 2) increase the amount of acreage available through large-scale pristine habitat destruction. Neither is satisfactory.

According to IBD, “[I]t takes about 1,700 gallons of water to produce one gallon of ethanol. Each acre of corn requires about 130 pounds of nitrogen and 55 pounds of phosphorous. Increased acreage means increased agricultural runoff, which is creating aquatic ‘dead zones’ in our rivers, bays, and coastal areas.”

Ironically, a case could be made that ethanol is not really “renewable green power” at all but rather a “fossil fuel” in disguise. You don’t just squeeze corn to make ethanol. The distilling process to convert corn starch to ethyl alcohol is energy intensive. According to Matthew Wald in the January 2007 Scientific American, to create 100 units of ethanol energy in the distillation process, you need 45 units of fossil-fuel (coal or natural gas) energy. Michael Wang, an environmental scientist at the Argonne Laboratory, calculated that the amount of fossil fuels is even greater if you look at the whole process (planting, fertilizing, harvesting, and distillation). According to Wang, to produce 100 units of ethanol energy, you need 74 units of fossil fuels.

Hide the True Cost

Given all these expenses—energy to make energy and a separate logistic system—how does the ethanol industry make any money? It doesn’t.

Were it not for the massive government tax preferences (a 51-cent-per-gallon tax break) and government protection (a 54-cent tariff on imported ethanol), this industry could not survive. That’s in part because countries like Brazil—the world’s largest ethanol producer—can produce it more efficiently using sugar cane. On a yield-per-acre basis, the amount of ethanol produced from Brazilian sugar cane is nearly double that derived from U.S. corn.

Even with all this help, the industry asks for still more. Last year the ethanol producers’ association, Growth Energy, petitioned the EPA to allow ethanol blends as high as 15 percent. For the majority of the cars and trucks in the United States, the highest ethanol level allowed by the EPA is the 10 percent blend. Anything above that could void existing car warranties. The exceptions are flex-fuel/dual-fuel vehicles, which can use E-85 gas because they have special stainless-steel fuel tanks and other upgraded fuel system parts. Besides the overused environmental and energy independence angle, Growth Energy claims that this change will create thousands of new jobs.

Revealingly, there is always one reason missing from the case for ethanol. We always hear that it is good for the environment, or it’s good for family farmers, or it creates jobs. But no one ever says that ethanol is good for the consumer. That’s because it isn’t. At the pump the consumer pays more to get fewer miles per gallon than with gasoline. Behind the scenes the consumers’ tax dollars are used to shore up a failing industry that drives up the cost of food and of maintenance of all engines that ethanol touches. It is time to admit that promoting ethanol as a fuel source has been a catastrophic mistake. We need to cut our losses and let the free market, not the government, determine winners and losers in the energy sector.

During 1933, Roosevelt’s first year in office, GDP increased about 17 percent. What would have accounted for that?

Not FDR’s 1933 decision to seize privately owned gold and devalue the dollar from $20 per ounce of gold to $35. This increased the value of gold held by the U.S. Treasury and entitled it to print an additional $3 billion of greenbacks. The Thomas Amendment to the Agricultural Adjustment Act (AAA) authorized the Treasury to print $3 billion more. Nonetheless, the total amount of currency held by the public didn’t increase until 1934. The Fed wasn’t very active during this period.

The most sweeping pieces of legislation passed in 1933—the climax of the Hundred Days—were the National Industrial Recovery Act (NIRA) and the Agricultural Adjustment Act, but both promoted contraction, not expansion. The NIRA authorized FDR to establish cartels fixing wages, prices, and output. The AAA aimed to reduce agricultural acreage.

Recovery Preceded Policy

It’s not clear how any of FDR’s 1933 policies could have accounted for a 17 percent increase in GDP, even if they promoted expansion, because they wouldn’t have had time to ripple through the economy. It seems more likely that FDR had the good fortune to come into office near the bottom of the Depression, and enough adjustments in wages, prices, and other factors had occurred that the economy was ready to recover. The economy had recovered from previous panics, crashes, and depressions without a big-government program. Undoubtedly FDR’s sunny personality and formidable communications skills helped give people confidence they could achieve a turnaround.

From 1933 to 1937 GDP increased about 60 percent. This was the biggest GDP expansion of the New Deal—and it occurred without federal spending and deficits that would qualify as Keynesian stimulus. Krugman wrote, “[T]he New Deal didn’t pursue Keynesian policies. . . . [F]iscal policy was only modestly expansionary.” Other economists, such as Price V. Fishback, agree that New Deal budget deficits probably didn’t contribute to recovery—Fishback calls FDR’s deficits “tiny.”

Since the NIRA and AAA promoted contraction, the Supreme Court gave the economy a boost in 1935 by striking them down. Ironically, FDR viewed the anti-New Deal justices as the “Four Horsemen of Reaction.”

Raising Labor Costs

It has often been said that the depression-within-a-depression of 1938 happened because FDR foolishly cut federal budget deficits, but that couldn’t have been the case since the dramatic 1933–1937 expansion occurred without meaningful deficit stimulus. Other factors help explain that depression, starting with the newly centralized Federal Reserve Board’s decision in July 1936 to increase minimum required bank reserves 50 percent and its decision in January 1937 to increase bank reserves another 33.3 percent. Suddenly, less money was available for lending, and interest rates went up—a double whammy for employers. The Social Security excise tax on payroll began to be collected in 1937, making it more expensive for employers to hire people. The undistributed profits tax became a big issue in 1937. The Supreme Court upheld the Wagner Act in 1937, setting off the rapid unionization of mass-production industries, which led to an 11 percent increase in wage costs during that depression year—and a resulting surge in unemployment.

The problem with the New Deal wasn’t expansion. The problem was the persistence of high unemployment despite expansion. Many economists point to New Deal laws such as the NIRA, the Wagner Act, and the Social Security payroll tax (there weren’t yet any Social Security benefits), which made it more expensive for employers to hire people. Whenever anything becomes more expensive, there’s likely to be less demand for it.

Uncertain Tax Environment

In addition, the succession of New Deal tax increases—1933, 1934, 1935, and 1936—reduced private funds available for hiring. And the constant tax changes made it hard for investors to estimate their potential risks and returns, so they remained on the sidelines. Investors, like everybody else, need predictable rules. No wonder investment was at historic lows during the 1930s. Without investment it was very difficult to create new jobs.

When FDR came into office he had Congress and the nation at his feet. He was hailed as a conquering hero. With his rhetorical acumen and political genius, he might have begun by forming coalitions to undo his predecessor Herbert Hoover’s biggest disasters: the 1930 Smoot-Hawley Tariff that throttled trade and the 1932 revenue act that doubled many taxes. Ending rather than embracing Hoover’s disasters would have been change that people could believe in! If, furthermore, FDR had avoided his own misguided policies, the expansion probably would have been more robust, and without the blunders of 1937, it might have lasted longer—and most important, it would have enabled the private sector to create millions more jobs.

The market is a complex order. A thief needs only violence to get rich; a cattle trader needs more things, such as order and justice; in other words, an environment where transactions can be safely completed. The market does not obey “the law of the jungle”—just the opposite: The law of the jungle prevails where there are no markets. Peaceful exchange with secure property rights is more productive than widespread robbery, but many criticize the rich regardless of the path they followed to opulence, as if they all had achieved their wealth illicitly. Apparently, George Bernard Shaw’s fallacious quotation still rules the day: “I am a gentleman: I live by robbing the poor.”

The most common way to make a fortune in a free market is organizing a successful company. How can this company succeed and pay handsome salaries? In a free market there is only one answer: by making something consumers appreciate. Under such circumstances, the businessman’s wealth is linked to the social utility of his labor, a utility proved by consumers who buy because they too benefit from the deal.

Of course, one can always make money breaking the law, as thieves and swindlers do. And there is also another method that, while unjust, does not always appear that way: to become rich by avoiding competition or gaining other privileges that only the state can grant.

Monopolies and protectionism exemplify these strategies. Both became the enemies of classical liberals, who argued in favor of the free market and against the privileged groups that injured the majority of the population by imposing high prices and limiting the ability to choose.

Alongside the state’s expansion during the past century, opportunities to profit from using the state to avoid competition have proliferated. Through the apparatus of government, lobbying groups have obtained power over their markets, subsidies, and every other kind of anticompetitive protection.

Blocking market activity breaks the connection between social needs and the supply of goods and services aimed at satisfying them. But it may turn out to be profitable: Fortunes have originated in anti-competitive privileges bestowed by political power or made possible by its regulations. In such cases it is fair to distrust the wealthy.

Often, however, no distinction is made when it comes to criticizing rich people. They all appear reproachable, and few dispute the need to impose on them specific burdens and progressive tax scales aimed at dealing with the “problem” of inequality. The state must force-fit all of us into a Procrustean bed.

Internal Robin Hood Service

Many thus would have the state play Robin Hood, robbing from the rich (no matter how they got the money) and giving to the poor. I do not dispute that this legend is open to several interpretations, including a plausible libertarian one. Robin Hood can be seen as an enemy of tyranny and the abuse of law, a friend of the people, a man who robbed tax collectors and privileged aristocrats, returning the money to the victimized peasants. This is a very appealing version of the story. My objection, however, is directed exclusively at the danger of casting the modern state in the powerful image of a hero seeking redress and justice. It uses this image to legitimize its vast distribution operations and to show its supposed liberality.

The notion of the state playing Robin Hood has two weaknesses. First, there is no way to prove that if the authorities take a dollar by force from a rich person and give it to a poor person, the collective happiness increases. As Anthony de Jasay says, the only way to solve the problem of comparisons between individuals is for the state to impose its preferences on the community. The outcome of these operations, in the words of Bertrand de Jouvenel, is not a redistribution of income from rich to poor but from everyone to the state.

The second weakness in the state-as-Robin-Hood argument is that it only works if the treasury is small. The state in the days of Robin of Locksley was limited, but when it takes on modern proportions, no matter what Barack Obama may say, it can no longer finance itself only by taking money from the very rich, who are by definition a minority. The state might pretend to do this, but in practice its only financing option is to take money from everyone.

One of the main arguments for the growth of the modern state is the fight against inequality. Some claim that without the state’s intervention, human beings would abandon the poor to their own devices and charity would prove both insufficient and insulting.

The allegation that, without the state’s helping hand, people would ignore their fellow human beings in poverty can’t stand even a cursory analysis. From the dawn of civilization, examples to the contrary abound. Voracious tax increases have not managed to extinguish the humanitarian impulse.

Charity is a noble and deep human feeling. Why is it dismissed and devalued? Why is it deemed humiliating, while state aid is viewed as a display of compassion?

Virtue Requires Liberty

Helping our fellow man and political distribution are very different actions. Let us take as an example the noble conduct of the Good Samaritan, a beautiful portrait of humanitarianism. A basic assumption—in truth, an essential element—of the parable is liberty. The Good Samaritan’s virtue stems from the fact that he acts voluntarily; if a centurion forced him to help the poor Jew, beaten and abandoned in the road, the parable would have made no sense. Virtue, in effect, demands liberty.

In this example, we see the demoralizing effect of state expansion. Many nongovernmental organizations, particularly in Europe, do not ask citizens to freely and voluntarily hand over a fraction of their income. Instead, they ask the state to extract sums from taxpayers’ pockets. Amazingly, the sacrifice of liberty and responsibility on the altar of political power is praised, while providing free and voluntary aid to one’s fellow man is dismissed as humiliating charity.

The fact is that where markets are permitted to work, fewer people need economic assistance of any kind. The centuries since Adam Smith wrote The Wealth of Nations have provided ample evidence to support his message: Free trade and security in one’s rights are the pillars on which individuals can improve their condition. Despite this, many people criticize the market economy and allege that it encourages marginalization. It is common to read statistics showing great poverty and accusations that market-oriented countries like the United States are infernos of inequality.

Not Condemned to Poverty

The problem with such statistics is that they are based on surveys that fail to track the same people through time. Thus they cannot provide the most important piece of information: Are the poor condemned to poverty or are they able to rise out of it? The statistics, in short, rarely measure social mobility. But when they do, they show that the poor have large possibilities of escaping the lowest percentile of income distribution. It is in fact more probable that a very poor person in America will climb to the highest income rung than that he will remain in poverty. One could argue that the data indicate mobility but not improvement, given that there is always a poorest 20 percent. Incomes in an advancing society like the United States, however, are not constant but rather are increasing—despite pervasive government interference—and this, not welfare, offers everyone the opportunity and the incentive to progress.

State-Sanctioned Inequality

Socialists and interventionists of all parties have reluctantly ended up accepting the market, but they claim government intervention is necessary to tackle inequality. However, inequality is only objectionable if there is a lack of competition and freedom. The modern state’s onerous and inefficient distributive structures, ostensibly built to wipe out inequality, have had perverse effects and a demoralizing impact on society, pushing different groups to fight over public favors. It is an out-of-control process in which, as the German liberal Ludwig Erhard said, everyone puts his hand in the pocket of everyone else.

The clamor from interventionists against inequality morphs into a clamor for a larger and larger state. This path leads to the loss of liberty and a distortion of both democracy and justice. It distorts democracy because, by attempting to solve inequality, it removes limits to power and expands the field of state action. It distorts justice because the only way to solve inequality politically is for the state to have the power to treat individuals unequally. Thus the struggle to eliminate inequality ends up destroying the most important form of equality for an open society: equality before the law.

Before considering the costs and benefits of energy independence, I should define my terms. What is energy independence? Various advocates and analysts have proposed various definitions, but two come up again and again. The first is that a country is energy independent if it is self-sufficient—that is, if it imports no energy from any other country. The second is that a country is energy independent if changes in world energy markets have no effect on that country’s price of energy. The first definition is more commonly used.

Although I could consider the issue of energy independence abstractly, it is more illuminating to examine it in the context of the actual U.S. economy. And I’ll focus on the major form of energy for which many Americans want independence: oil.

Currently, the United States uses about 20 million barrels per day (mbd) of oil and petroleum products and imports about 60 percent—or 12 mbd—of that. The most straightforward way to reduce imports to zero would be to ban imports or to impose a stiff tariff on oil designed to reduce imports to zero. With 12 mbd gone from the U.S. daily supply, there would be only eight mbd to serve consumers who were accustomed to using 20. A substantial rise in price would result. As it rose, the amount demanded would fall and the amount supplied domestically would rise. The price would increase until the two were equal.

How high would the price have to go? The honest answer is that no one knows—even the most seasoned, informed energy economist. The reason is that to compute the new equilibrium price, one would have to know the elasticities of supply and demand—that is, the measures of sensitivity to price changes of the amount supplied and demanded. We have reasonable measures of those elasticities for the range of prices of oil that we are used to. But the current price of oil (about $125 per barrel at this writing) is, even adjusted for inflation, above that usual range, and so we know little about elasticities at that price or above.

Yet, even if the elasticities of supply and demand were each as high as 1 (they are generally thought to be much less than that)—so that a 1-percent increase in price would lead to a 1-percent increase in quantity supplied and a 1-percent decrease in quantity demanded—it would still take a price increase of at least 40 percent to equate the amount supplied domestically to the amount demanded. That would imply a price of over $180 per barrel. And few economists believe that the elasticities of demand and supply are as high as 1. The lower they are, the higher the price must go to equate the domestic amount supplied to the amount demanded. It would probably go to over $200 per barrel.

This means that to be self-sufficient in oil, Americans would have to pay in excess of $180 a barrel when, instead, they could be “dependent” on other countries’ supplies and pay the world market price of $125. That’s not a good deal for Americans. To put it in terms that everyone who drives a car understands, a $180-per-barrel price of oil would increase the price of gasoline by about $1.20 a gallon (the $50 increase in price divided by 42 gallons to the barrel).

Comparative Advantage and Dependence

Energy “dependence” is much cheaper. In fact, the case for being “dependent” on other countries for oil is the same as the case for being dependent on other countries for bananas or coffee. At some tariff-protected price, the United States could be self-sufficient in bananas or coffee. If the price were high enough, someone would grow bananas and coffee plants in greenhouses. But why would we want that? Why would we want to pay more for coffee and bananas than we need to? Another way of saying that we would pay more is that we would give up more of our resources (capital, labor, and land) to have domestic bananas and coffee than we now give up by producing other things with these resources and using the proceeds to buy coffee and bananas more cheaply abroad. We would be poorer. The reasoning doesn’t change when the good is oil. By preventing people from importing oil, either with a ban on imports or a tariff on oil, the government would make us poorer.

Or think of it another way. Do you ever take your shirts to the local cleaner to be washed? If so, you are “dependent” on the cleaner. You could wash your shirts yourself, but you don’t. The reason you don’t is that your time is more valuably used producing other things, some of which you sell, and using some of the proceeds to pay the cleaner.

Moreover, think about the word “dependence.” The image the word creates is of a poor, helpless waif. I picture Oliver Twist in the musical Oliver, who after eating a meager amount of food, says, “Please, sir, I want some more.” But U.S. consumers of oil are not poor, helpless waifs seeking the good will of oil-producing nations that are giving us oil out of kindness. Rather, they sell us the oil. We “need” the oil and they “need” the money. To the extent that dependence exists, it is mutual. International trade in oil is just that: trade. Since both sides gain from trade, each is therefore “dependent” on the other. Producers of oil are dependent on the dollars, euros, and yen that buy the oil. This fact is commonly recognized when the topic is U.S. exports; many Americans worry that we don’t export enough because they want our exporters to earn money from people in other countries. In other words, they see that our exporters need the dollars, yen, and euros that they earn on their exports. But, somehow, they fail to see that this is true of foreign exporters too. Exporters in the Middle East, Venezuela, and Canada need the income from exporting oil. “Dependence on foreign oil,” because it is so one-sidedly misleading, is a term that belongs in the dustbin of history.

But isn’t it important to avoid depending on oil when so much of it is produced in the politically unstable Middle East? It would be nice if the Middle East were less unstable. But whoever is in charge of the oil wants to produce it to make money. So, it matters little, from the viewpoint of oil supply, which particular tyrant runs which particular oil-producing country.

Dependence and Government Ownership

It is true, and troublesome, that the world oil industry is largely a government-run industry with all the problems that accompany government enterprise—high cost, slow reaction times, little innovation, and so on. And it would be nice if governments in Saudi Arabia, Iran, the United Arab Emirates, Venezuela, Britain, Norway, and Canada denationalized their oil supplies. But until that happens, it’s still better to pay the lower price that producers in the world market charge rather than the higher price that would result from “independence.”

Some people worry that a government in a major oil-producing country—Saudi Arabia, for example—might get upset at the U.S. government and take it out on Americans by refusing to sell us oil. But such a selective embargo is bound to fail. Imagine that Saudi Arabia cuts oil exports to the United States, but maintains total exports. Then it must sell these suddenly freed-up oil supplies somewhere else. Let’s say that it ships the additional oil to buyers in China. Then those buyers will want to buy that much less oil from their old suppliers. Presto! The American buyers’ problems are solved because they can get this oil.

In short, when the government of one country tries to selectively target people in another country, but still wishes to maintain output, it cannot succeed. The selective “oil weapon” is a dud. It’s like a game of musical chairs with the same number of chairs as players. The game would be awfully boring, which is why it is not played that way. But in the case of international trade, boring is good.

Of course, the Saudis could hurt the United States by cutting exports in total. But then the Saudis would hurt all oil-importing countries, not just Americans. This is in fact what happened in 1973, when the Saudis embargoed the United States and the Netherlands over those two countries’ governments’ support of Israel. The countries were hurt by the new, much-higher price of oil. But so was every other oil-importing country. So it is true that a government of an oil-producing country can occasionally get nasty, cut the world supply of oil, and raise the world price. It’s also true that if the U.S. government insulated the country from the world oil market by ending imports, it could avoid these occasional price spikes. But the irony is that it would avoid the occasional spike by replacing it with a permanent “spike.” Imagine that haircutters unionized and had the occasional strike and that during such strikes the price of a haircut rose to $30 from its normal $20. You could avoid the high price by resolving always to cut your own hair, even when the price is $20. Would that be a good idea?

Subsidizing Alternative Fuels

Many supporters of “energy independence,” instead of arguing for a ban or prohibitive tariffs on oil imports, advocate government subsidies for alternative fuels or for conservation. They seem to think that such policies can create energy independence at a low cost. They are mistaken.

The cost of using these alternatives, if successful in driving oil imports to zero, would actually be quite high. What makes these other policies politically attractive is not that they cost little, but that they hide the cost. A tariff on oil is a tax, and people can see the result of the tax in the price of oil. A subsidy to alternative fuels or to conservation, however, comes from the government’s treasury or from some other source and therefore is not visible to more than a small percent of the population. Economist David Loughran and engineer Jonathan Kulick studied the effect of state public utility commissions’ policies requiring electric utilities to subsidize their customers’ investments in conservation. The subsidies came not from tax revenue, but mainly from higher prices to other customers. Loughran and Kulick found that the cost of the conservation was between 14 and 22 cents per kilowatt-hour. This was a whopping two to three times as expensive as the energy conserved. (David Loughran and Jonathan Kulick, “Demand Side Management and Energy Efficiency in the United States,” Energy Journal 25, no. 1 [2004], cited in Jerry Taylor and Peter Van Doren, “Energy,” in David R. Henderson, ed., The Concise Encyclopedia of Economics.)

“Energy independence” is a bad idea. Every individual understands that it is far better to depend on others for most of what we want rather than trying to do everything for ourselves. This is true whether we’re buying oil or haircuts. The principle applies to groups of individuals living in large geographical areas called countries. Moreover, the dependence is mutual. In 1776, Adam Smith wrote in The Wealth of Nations, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner but from their regard for their own self-interest.” We can comfortably depend on foreigners for much of our oil because the world’s oil suppliers want to make money.