Thursday, June 12, 2014

How Smugglers Made America

By Mark Thornton
[Smuggler Nation: How Illicit Trade Made America by Peter Andreas, Oxford University Press, 2013.]
Whenever I receive a book to review that is written by some hotshot ivy leaguer, I brace myself for all the deception and tomfoolery that I will have to endure. Peter Andreas’s Smuggler Nation, however
, turned out to be a very pleasant surprise. Indeed, I can recommend this book to anyone interested in a true history.
Reading Andreas’s account we can note first of all that smuggling in America has been around since colonial days and will continue into the foreseeable future. Moreover, smuggling has played a very prominent role — not just a subsidiary one — through our history. Indeed it has often played a pivotal role in important events and historical episodes. And finally, Andreas’s account illustrates how smuggling is the result of prohibitions and protective tariffs. The cumulative impact of these policies has been the driving force for the establishment of big government and the police state in America.
Andreas makes it clear that the policies that create incentives to smuggle are irrational, ineffective, and often counterproductive. He also makes it clear that Americans have been duped into supporting various prohibitions to suppress vice by self-promoting politicians, self-interested bureaucrats, moralistic crusaders, and a compliant press. It is also interesting to note that smugglers were often considered heroes, if not by the majority, then certainly by consumers they served. It is also important to point out that readers will find that many of the wealthy and prominent families in American history, including several of our founding fathers, first grew rich on the profits from smuggling.
The book consists of sixteen chapters divided into five sections. It is all well-written and packed with interesting information and tidbits of American history. However, I am going to focus on the three chapters for which I have the most expertise. The first chapter to discuss covers the Union’s Civil War blockade by the South. The author clearly describes the unappreciated importance of the “naval” aspects of the war as well as North-South trade during the war, the Confederacy’s grand miscalculation regarding King Cotton and the blockade, and that the battle between blockaders and blockade runners was for profit and largely non-violent.
However, the author wrongly concludes, along with many historians, that the Union blockade was a success. He seems uneasy with this conclusion and he uses the famous historian James McPherson to make his point. Andreas claims that the blockade was relatively successful despite noting the point: “Fast-foreword to the American Civil War, where for the first time the side imposing the blockade was the victor.”
Blockades do raise transport costs and prices. They do reduce the amount of trade. However, higher prices are profit incentives that keep important goods flowing, as well as incentives to economize. Higher prices also open up bribery opportunities which kept goods flowing over the border between Union and Confederacy. Therefore we should never expect blockades to be truly successful.
In an article referenced by Andreas, and co-authored by Robert Ekelund, John Jackson, and myself, we explored the apparent success of the Union blockade.[1] What we found is that a long series of ill-conceived Confederate policies were implemented that discouraged blockade running. This culminated in the Confederate Trade Legislation of 1864. This legislation prohibited the importation of a long list of luxury goods, put controls on the importation of other goods, and commandeered half of all cargo space on blockade runners for use by the Confederate government.
Not surprisingly, entrepreneurs in the blockade running business were immediately and thoroughly discouraged from further runs. This legislation was particularly discouraging for crew members who were allocated a small space in which they imported luxury goods. The profits that they gained by selling the luxuries was the important part of their pay for running the blockade.[2]
The chapter on alcohol prohibition is particularly good and entertaining. At this point in history there have already been several foolish and counterproductive efforts to control alcohol in one way or another in America. The 18th Amendment to the Constitution that prohibited alcohol would turn out to be the biggest social mistake since the days of slavery.
The author does a good job of explaining how disruptive Prohibition was to the lives of ordinary Americans as well as its harmful legacy it had on the rule of law in America. He even correctly notes that the repeal of prohibition, the 21st Amendment, was brought about because of “money.” In this case it was the need for tax revenues during the early years of the Great Depression.
However, the explanation for the 18th Amendment being adopted is less convincing because it rests largely on distrust of Germans after WWI. The “money” explanation rests on two factors: 1. The new Income Tax meant that Congress was no longer so dependent on alcohol and import taxes for their revenues. The Income Tax brought in more money than expected. 2. John D. Rockefeller donated huge sums of money to groups like the Anti-Saloon League to help them prohibit his biggest competitor, alcohol fuel for cars, from competing with his gasoline.
While alcohol prohibition might be characterized as the biggest scam in American history, it is safe to say that drug prohibition is the longest running scam in American history. I was glad to see that the author found that there were no major social problems associated with these drugs prior to the government’s efforts to ban them and likewise there was no popular support for the bans. Indeed, the Harrison Narcotics Act was only a regulatory effort that was turned into a prohibition by bureaucrats and the courts. The same thing happened years later with the Marijuana Tax Act. The author helps us see that what we currently see in the war on drugs is the norm, the result of a century of scams and ever-expanding prohibition.
Support for both prohibitions was based on ignorance, prejudice, and religion, as well as bureaucratic interests and special interests. The author does sneak in a public interest justification for the Pure Food and Drug Act, but doctors and pharmacists were clearly acting in their self interest and merely used the “public interest” as cover for their activities. Basically they split up the market so that doctors prescribed the drugs and pharmacists sold the drugs. Prior to this legislation, both groups were competing in both markets.
The chapter on drug prohibition is a good place to bring out two concepts in economics that generally appear throughout the book, but are not labeled as such. The first is the Alchian and Allen “effect.” This finding says that if you add a fixed cost to two goods which are viewed by consumers as substitutes you make the more expensive good relatively cheaper. The Alchian and Allen effect explains why blockade runners smuggled high-priced, low-bulk “luxury” goods instead of corn. It is also why bootleggers smuggled whiskey rather than beer and why drug cartels switched from marijuana to cocaine when the government increased law enforcement budgets and prison terms.
Like many other writers on this subject, including Steve Levitt, the introduction and expansion of the cocaine in the early 1980s is treated by Andreas as something that just happened. Clearly it was the expansion of budgets, prison terms, and the South Florida Drug Task Force which increased the risks of smuggling drugs (a fixed cost), leading smugglers to switch from bulky marijuana to compact and potent cocaine.
The second concept is the Baptists and Bootleggers “effect.” The term was coined by economist Bruce Yandle, but it dates back to Rothbard (1962) and earlier. It basically says that certain special interest groups with diametrically opposed views may nevertheless work toward a common goal and may even directly support one another. With alcohol, some Baptists are opposed to the drinking of alcohol and support prohibition. Bootleggers also support prohibition which keeps the price high and provides profit opportunities. You see this phenomenon throughout the book in various forms. Andreas, for example, tells us that textile machinery was both heavy and bulky and therefore difficult to smuggle, leading some to merely smuggle the plans for building such machinery. The Baptist and Bootlegger effect underscores the fact that all the protectionism and prohibitions were private-interest scams that were not in the public interest.
In summary, this book tells the history of wrongheaded policies of protectionism and prohibition in American history. Very often the policies are invoked to address spurious or even non-existent social problems. As the truth is told, these policies never serve the public interest and are usually counterproductive to the goals they are designed to achieve. The legacy costs of these policies are huge, including the weakening of the rule of law and the Constitution, as well as giving us 1984-style big government and the police state. Specialists in such diverse areas as immigration reform, intellectual property, criminology, logistics, and terrorism will find the book both interesting and useful. Those who like to read about American history will find a different picture of the past.

1 comment:

  1. Does Tom Woods count as a hot shot ivy leaguer ?