As an adolescent, I read and reread a well-worn copy of Eliot Ness’s The Untouchables, always captivated by the story of the incorruptible government agent. Ness and his 12 Prohibition agents took on Al Capone, the most recognizable gangster and bootlegger of the age, risking life and limb to protect the city streets of Chicago. Whether facing down Al Capone’s tommy-gun-toting henchman or prosecuting police corruption, Ness always appeared to be the last bastion of moral probity in an era of open violence and licentiousness.
In my boyhood imagination, Ness and his 12-man crew were the Untouchables — the perfect federal regulators. They protected the populace from social disorder and chaos in the streets.
Looking back on this fairytale version of Ness’s exploits with a little more wisdom and experience, one can easily see that nothing could be further from the truth.
What Crony Capitalists Can Learn from Organized Crime
Ness and his crew were termed “untouchable” because they would neither accept a bribe nor compromise their loyalty to the government. Therefore, the “Untouchables” moniker is something of a misnomer. Ness and his crew were infinitely corruptible; that is, they were corrupt enough to uphold an incredibly unjust federal law that pleased only teetotalers, puritans, Mafiosi, and social reformers, and that drove millions of people out of peaceful work at the behest of a government monopoly over the individual conscience. The moral bankruptcy of the Untouchables is not in the least lessened by the fact that they intended to suppress the crime that their own actions had stimulated by criminalizing a popular American “vice.”
The criminalization of the alcohol industry in 1919 put an end to the traditional federal tax on alcohol by transitioning into complete market suppression. Prohibition only ended the under-the-table extortion through which government agents of the Treasury were once paid with federal sanction. Prohibition agents were notoriously corruptible (and also agents of the Treasury), and they often took bribes from the bootleggers and gangsters who co-opted the industry after the government shut down the nation’s peaceful stills and breweries. When Prohibition agents and municipal police began negotiating the terms of their extortions with the bootleggers directly, the federal government mistakenly saw in this municipal and federal corruption something different than its own erstwhile extortions in the form of the alcohol excise. The only difference between the two graft systems lay in the fact that under 18th Amendment the State couldn’t leverage those municipal bribes against the national debt quite so easily when the legal plunder was “criminalized” by federal statute and shifted entirely to the enforcement of alcohol bans.
As breweries shut their doors, they sold their criminalized capital to the highest bidders in order to save themselves from complete financial ruin. In Chicago, the loan shark Johnny Torrio bought up unused stills and nurtured a “protected” underground market for alcohol consumption and distribution. In order to fend off the Prohibition agents who threatened the peaceful breweries, Torrio simply brought guns and graft into the equation, applying his loan-sharking business model to the alcohol market. After Torrio was gunned down in 1925, his enterprising protégé Al Capone took the reins of the bootlegging empire. During the Prohibition era, once-peaceful consumers and distributors of alcohol were caught between the split personalities of reciprocal states — the puritanical saints and the scar-faced devils.
Prohibition caused the price of alcohol to jump, because bootleggers had to offset the opportunity costs of running a criminal enterprise. Prohibition not only stifled domestic production, but also shut down the legal exportation and importation of alcohol. Many smugglers did manage to circumvent the laws and the customs houses, and they did not always deal their goods through Mafia networks or the customary state syndicate. For the most part, smugglers and bootleggers merely bribed local lawmen or delivered their goods under the radar, and did so peacefully. Alcohol distribution went on much as it had before Prohibition, just through more inventive (and cost-ineffective) means. Some smugglers took to the rails and stocked coal cars with hidden liquor; others combined trades and floated their booze downriver from Canada into the states, the barrels tucked safely into timber supplies. The Vancouver and San Juan islands applied their smuggling expertise, since what various states deemed “illegal trafficking” they had always seen as “good business.” While some of the volume buyers that the smugglers found on the mainland were Mafiosi who engaged in the new “protection” racket, there were plenty of buyers in the West who had no connection with any criminal racket whatsoever.
What we see in Mafia violence is not an organized market resistance to state tyranny, as many apologists for Mafia racketeering have argued. By 1926, Capone was making something on the order of $100 million per year, but he was spending more than a quarter of his profits on his municipal and federal graft. He was purchasing the cooperation of the rival government syndicate in order to stave off full federal intervention with the alcohol market’s Mafia-led “protection.” By purchasing the cooperation of the state, he propped up the unproductive state monopoly of law enforcement, leaving the market at the mercy of two violent monopolies. He also leveraged aggressive bribes against his competitors in order to use the state as his greatest ally. By snitching on rivals, Capone hoped to shut out competition by force.
What the state should have seen forming in the Mafia-controlled black market was a clear reflection of itself as a regulator of the alcohol industry, albeit with a couple of more scars and bruises.
In the November 2011 issue of The Harvard Business Review, counterterrorist law enforcer Marc Goodman argues that crime syndicates are “especially adept at expropriating legitimate business tactics to create highly efficient global teams and set new best practices in adaptive strategy, supply chain management, the use of incentives, global collaboration, and other disciplines.”1 One can only hope that the article’s title (a blatant non sequitur), “What Businesses Can Learn from Organized Crime,” was intended only to catch the reader’s eye during a cursory perusal of HBR headlines. For someone seems to have missed the point if he thinks that legitimate businesses can learn “legitimate business tactics” from what violent extortionists had first expropriated from the marketplace’s legitimate business tactics. Why relearn from criminals what one originally taught to the political interlocutors, and then call the product innovation?
The monopoly of goons with guns was never required.
The only thing legitimate competitors in the market can learn from the Mafia is how a state can supply the same services with a smile and an aura of “untouchability.” The mafia is a fascist corporation that intimidates its customers through a monopoly on force, supported by graft, and rivaled only by the State. As long as a market of protection services is suppressed so that the State’s own public safety squadrons remain the only legal racket, citizens have no recourse to private defense if the State’s racket turns sour and breeds violent doppelgangers. If the mafia is more violent than the State, then it is only because the mafia is outgunned by the federal armory and does not have a reciprocal monopoly of mafia-controlled prisons for captured State goons.
Fecit Qui Profuit
Murray N. Rothbard assures us that, other things being equal, a corrupt government is still better than an incorruptible government, although neither is actually justifiable in principle. An active government that takes bribes is still better than one that is staffed with untouchable inquisitors, but it would be better yet to have no state apparatus at all. “A ‘defensive bribe,’” Rothbard writes, “is a perfectly legitimate response to an unfortunate situation.”2 Thus, if a producer of a prohibited good (e.g., marijuana, salvia divinorum, moonshine) bribes local law officials to allow him to produce his goods, then no harm is committed by the briber according to libertarian standards, even though the law officials are clearly engaged in Mafia-style “protection.” The relatively peaceful history of smuggling and bootlegging in the West bears testimony to this fact, even during the Prohibition era.
An aggressive bribe, on the other hand, does much harm by initiating force. During Prohibition, the Anti-Saloon League, for instance, influenced public “servants” to initiate governmental aggression against the alcohol market in order to rid city blocks of saloons, pool halls, and cigar shops, thus attacking the quintessential American vices. Al Capone paid both aggressive and defensive bribes, winning corrupt police to his side in order to shut down rival bootleggers. Ness and his Untouchables, too, were part of the aggressive-bribe racket, because they were merely the business end of the Anti-Saloon League’s political maneuverings.
Defenders of Prohibition paid little heed to libertarian attacks on central planning. As bootleggers defied the Treasury’s corrupt agents and Mafiosi spread violence through urban streets, teetotalers scoffed when libertarians griped about the long-run effects of arbitrary state violence. One motor-engine-company CEO was flabbergasted in 1922 that anyone could even entertain the possibility that the repeal of the 18th Amendment would solve the problem of Mafia violence. He targeted what he saw as libertines in libertarian guise — the “loud advocate of personal liberty who persistantly [sic] talks about something having been unfairly put over on the country and who point[s] to violations as evidence that Prohibition is and must be a failure.”3 He saw opposition to Prohibition as the advocacy of chaos and crime resulting from the 18th Amendment:
The poison of their arguments is reflected in the lawless spirit seen so wide spread. To my mind, these men are dangerous breeders of lawlessness and the brood is the bootleggers rightly despised by all good people.
Although black-market violence is often the whipping boy of libertarian protests against state prohibitions, we should not assume that prohibition always and everywhere breeds chaos and mafia violence throughout the United States. The prohibition of marijuana has not led to uniform outbreaks of violence and chaos either, because many teenagers get their pot through local growers who do not conduct business at the barrel-end of an AK-47. Much moonshining and bootlegging was accomplished under the radar without violence during the Prohibition era. The level of violence one sees in an industry is directly correlated to the threats of state violence leveraged against it. Where enforcement of prohibitions is slack or corrupt, retaliatory violence tends to be low.
A popular argument of the early 1900s asserted that if Prohibition were passed into law, workers would become more efficient and could transfer their services to more profitable outlets than drinking and gaming — say, toward shipbuilding.4 The sound economic argument concerning the benefits of increased worker productivity were perverted into normative judgments against alcohol’s social utility. “Hence,” concluded one fascist defense of social productivity to the exclusion of individual satisfaction, “let’s put the saloon out of business, and increase the general prosperity of the working-man, the boss and the public.”5
The slave-driving state saw drinking as a dead-end outlet for the worker’s paycheck when that paycheck could serve “socially” beneficial ends. Herbert Hoover, the “do-nothing” head of the Food Administration under Woodrow Wilson, found this to be a rather winning argument, and he used it to pressure the administration into passing Prohibition in the first place. This facile argument of course ignored that every efficient saloon owner, brewer, cooper, and distiller would also have to transfer his services to another outlet — say, shipbuilding.
As preparations for World War I were underway, logical fallacies (i.e., “correlation equals causation”) were also on the rise, and they seemed to accrue around the subject of, well, shipbuilding:
When one realizes that previous to the war it required from a year to eighteen months to build the kind of a vessel the Skinner & Eddy Company has just turned over to the Government in one hundred and nine days, and the company’s contract with the Government did not call for delivery of the ship until the fourth of next July, one must believe that Prohibition does have something to do with speeding up war work. Let us have the benefits of it for all shipyards and for all war industries.6
According to this questionable logic, Americans might have been spared the monumental casualties of World War I (and thus World War II) if they had simply stayed at home and had a drink — and kept away from the naval shipyards, of course.
Lucrative federal contracts and the revolving door in Washington are, of course, more believable causal agents of shipbuilding booms during World War I than the putative benefits of Prohibition. If the state raises taxes and then channels money to dead-end arms races, then of course there will be a boom in production. By 1921, the Skinner & Eddy shipyard had closed its doors due to a postwar depression in shipbuilding. In Austrian economics, we point to such events as evidence of malinvestment. Skinner & Eddy shipyards would never have experienced such cataclysmic booms and busts without artificial stimulation caused by state intervention for destructive ends. According to the Prohibitionist’s logic, however, we would have to assume that the demise of Skinner & Eddy was linked to a spike in drunkenness (or “animal spirits”) amongst those rascally shipbuilders.
In the Carolinas, the forerunners to Prohibition had set up a system of alcohol dispensaries in order to shift the demand from saloons to socialist warehousing units. These state-run monopoly cartels succeeded in establishing a complete government takeover between the 1890s and the early 1900s, using the proceeds of monopoly to fund public works at the discretion of state caretakers. Individuals could purchase their alcohol from the dispensaries, but they were not allowed to drink on the premises. Naturally, the state monopoly favored local brewers over larger distilleries when stocking the dispensaries, thereby cutting out price negotiations with those who provided cheaper alternatives through interstate trade. In other words, the Carolinian dispensaries set up a fascist “protection” racket — a socialist union monopoly — that reaped massive rewards for brewers who supported the cause for that very purpose, as well as for the state authorities. Citizens who were alarmed by the widespread corruption that resulted — and the immense profits to be had by the monopolists — advocated for the dismissal of the dispensary system. Prohibition merely nationalized the problem.
The Volstead Act (1919), which was the enabling agent of the 18th Amendment, ensured that ample supplies of liquor would be set aside for alternative fuel research, as well as religious ceremonies. In a move typical of puritans, that which was denied the public was granted the holy clique of social reformers and researchers for approved purposes. As long as teetotalers imbibed wine under the pretense of transubstantiation, whether literal or symbolic, and as long as the end of such endeavors was not drunkenness but instead the mystical communion between man and God, then the act was deemed harmless. When anti-Prohibition groups like the Molly Pitchers Club advocated for the repeal of the 18th Amendment and a return to state regulation during the 1924 Democratic Convention, the liberal reformers and social conservatives treated the club’s watered-down market agenda as reactionary treason and its members as ideological “nullificationists.”7 Insofar as this charge might have been true, history proves that the nullification of interventionist constitutional revisions is a boon to the economy, as well as to public safety.
The “Blessings” of Prohibition
Prohibition in the early 20th century was not so much a ban on alcohol as a kind of monopoly restructuring — shifting the excise to municipal graft, fostering the conditions for a new armed banditti to take up the “protection” racket, and stepping up enforcement of bans — and it was not always unpopular with businessmen. Instances of workers “calling out” for “sickness” were on the decline. Prohibition laws made liquor and alcohol more expensive on the black market, in some cases driving the price up from $5 to $10 per quart. Many employers looked beyond the widespread costs to the costs that they, as employers, cut by obtaining a sober workforce.8
When the cost of policing the labor force was passed onto the state under Prohibition, businessmen rejoiced much as they always do when passing administrative costs onto taxpayers. One treasurer of the Alexander Manufacturing Co. even went so far as to declare the suppression of alcohol as an achievement on par with the advent of the motor vehicle and the spread of electric power: “I consider Prohibition one of the greatest blessings to the human race that has come about within a generation.”9 If the workers were more inclined to be sober, some businesses would see increases in production and fewer lost-time accidents without having to step up pay incentives.
The “Untouchables” mystique is a rather perplexing phenomenon to explain, since “untouchable” federal regulators remain the ideal paladins of democratic interventionists. While children who read Ness’s book might be thrilled by car chases, police raids, assassination conspiracies, and gunfights in the streets, it is difficult to see why Ness and his crew should have ever earned respect. Ness refused to take a bribe from anyone except the federal government, and even then from its most disreputable department — the Treasury. His employment was part of a corrupt state regime that increased crime, put thousands out of work, penned thousands more in prison, and consigned unlucky souls to the grave for exercising a natural market right — the pursuit of happiness. He was a part of the war on peaceful commerce — not “’a politico-criminal alliance formed between a civil administration and a gun-covered underworld for the exploitation of the citizenry’” — and he considered it one of the failures of his efforts against Capone that the gangster was finally sentenced to prison for income tax evasion rather than Prohibition offenses.10 In reality, however, there was no difference between the two charges.
Capone’s income was the target all along. While “untouchable” federal employees often brag about the fact that they do not personally benefit from their labors on the public’s behalf, Capone flaunted the fact that he was profiting from his labors as the premiere regulator of the alcohol market. Of the two American treasurers who achieved their means by force rather than compromise, Capone was perhaps only guilty of being more honest about his intentions.
- 1Goodman, Marc. “What Businesses Can Learn From Organized Crime.” The Harvard Business Review. November 2011. My italics.
- 2Rothbard, Murray N. . New York: New York University Press, 1998. p. 185.
- 3Heil, A.L. “Great Good Has Been Accomplished Despite the Fact that Some Rich Lawbreakers Are Debauching Their Friends.” In The Prohibition Question Viewed From the Economic and Moral Standpoint. Baltimore: Manufacturers’ Record Publishing Co., 1922. p. 27.
- 4Stelzle, Charles. Why Prohibition! New York: George H. Duran Company, 1918. p. 116.
- 5Ibid., p. 115.
- 6Anon. “Prohibition as a Boomer of Ship-building.” In Temperance: A Monthly Journal of the Church Temperance Society 9.20 (May 1918): p. 9.
- 7Rose, Kenneth D. American Women and the Repeal of Prohibition. New York: New York University Press, 1996. 68.
- 8Modern corporations have simply done away with the need for Prohibition on this front. Since drug and alcohol screenings provide a means of discriminating against irresponsible employees who would otherwise come to work drunk or high (especially in jobs where negligence can entail high costs in the form of ruined machinery and insurance payouts), employees take responsibility for their own decisions. Those who wish to exercise bad decisions, drink to excess, smoke occasional joints, call out for “sickness,” and show up to work with hangovers may just as well seek employment in unskilled jobs under less discriminating employers (perhaps also losing insurance coverage in the meanwhile). The market tends to self-regulate and establish its own work ethic independent of state oversight. Prohibition — of any market phenomenon — only tends to exacerbate the so-called “problem.”
- 9Moore, J.R. “Prohibition One of the Greatest Blessings to Human Race.” In The Prohibition Question Viewed From the Economic and Moral Standpoint. Baltimore: Manufacturers’ Record Publishing Co., 1922. p. 26.
- 10Cf. Ness, Eliot and Oscar Fraley. The Untouchables: The Real Story. New York: Pocket Books, 1987. p. 13.
