[Individualism and Economic Order by F.A. Hayek (Ludwig von Mises Institute 2009 [1948]; vii + 272 pp.)
Friedrich Hayek was one of the greatest Austrian economists of the twentieth century and, in Individualism and Economic Order, he collected some of his most important essays. The book was published by the University of Chicago Press in 1948 and reissued by the Mises Institute in 2009. In this week’s column, I propose to apply a point Hayek makes that is relevant to the War Between the States.
So far as I am aware, Hayek never wrote about this war, but some points he makes in “The Economic Conditions of Interstate Federalism,” Chapter 12 of the book, are of interest. When the article was first published in 1939, many people in Britain and the United States, both “liberal” (as Hayek uses the word) and not, were interested in federal union, primarily as a means of combatting Nazi Germany; and indeed, the article appeared in the journal of Clarence K. Streit, the leading advocate of a federal union between Britain and the United States.
Hayek was attracted to the idea of a federal union, though, primarily for another reason. It provided a partial answer to what was for him the fundamental problem confronting him, given his economic and political views: In a modern democracy, in which most people are hostile to the free market, how can the public be induced to support, or at least to accept, free market economic policies? Federalism might provide part of the answer in that the structural requirements for a successful federal union would lead people to the correct policies.
Tariffs and trade restrictions were a key example of what he had in mind. Though the case for free trade is, for the economist, easy to grasp, the public resists it, and, one might add, continues to do so even now, as the popularity of President Trump’s high tariff policy attests. People support tariffs because, they think, they help the people of their own country; and if they harm the citizens of other countries, that does not matter. Economists may assure them that they are mistaken, but they will not listen.
Here precisely is where a federal union makes a difference. Tariffs by one part of the union against another part hurt fellow citizens of the federal union, thus making the popular case for tariffs inapplicable. As Hayek puts the point,
. . . in the national [i.e., non-federal] state current ideologies make it comparatively easy to persuade the rest of the community that it is their interest to persuade the rest of the community that it is their interest to protect “their” iron industry or “their” wheat production or whatever it might be. An element of national pride in “their” industry and considerations of national strength in case of war generally induce people to consent to the sacrifice. . . . It seems clear, that, in a federation, the problems of agreeing on a common tariff will raise problems different in kind from those that arise in a national state . . . it is difficult to visualize how, in a federation, agreement could be reached for the protection of particular industries. The same applies to all other forms of protection. . . . It will be much harder to retard progress in one part of the federation in order to maintain standards of life in another part than to do the same in a national state.
The US Constitution partially recognizes Hayek’s point, in that states are forbidden to enact tariffs on other states. Unfortunately, it did not take account of another point Hayek makes, and this is where Hayek’s analysis becomes relevant to our civil war, Hayek says:
That Englishmen of Frenchmen should entrust the safeguarding of their lives, liberty, and property—in short, the functions of the liberal state—to a suprastate organization is conceivable. But that they should be willing to give the government of a federation the power to regulate their economic life . . . seems neither probable nor desirable.
In other words, neither the federal government nor the states should have the power to restrict freedom of trade. But though the Constitution forbids states from enacting tariffs, it allows the federal government to do so. Article 1, Section 8 states: “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.”
As is well known, Northern industrial interests took full advantage of this provision to impose heavy tariffs that helped particular industries but were inimical to the interests of the Southern states. These tariffs were a continual source of complaint by the South throughout the antebellum era, and Abraham Lincoln, in his first inaugural, stated that “duties and imposts will be collected.” Many of my readers will be familiar with books by Tom DiLorenzo and Mark Thornton on this topic.
The Confederate Constitution remedied this grave defect. Article 1, Section 8 of the document states that:
The Congress shall have power -
- To lay and collect taxes, duties, imposts, and excises for revenue, necessary to pay the debts, provide for the common defense, and carry on the Government of the Confederate States; but no bounties shall be granted from the Treasury; nor shall any duties or taxes on importations from foreign nations be laid to promote or foster any branch of industry; and all duties, imposts, and excises shall be uniform throughout the Confederate States.
The use of tariffs strictly for revenue was not in dispute; until the twentieth century, revenue tariffs were the most important source of federal revenue. Unfortunately, the Framers of the Constitution—beguiled by the siren song of Alexander Hamilton—ignored the lesson Hayek was later to teach.
