At its peak in the 1920s, the Ku Klux Klan boasted four million members, a figure that has long reinforced its image as a powerful political force that employed terror to keep Jim Crow alive. But how much power did it actually wield? According to a new study that examines the Klan’s effects, not much. For their paper “Hatred and Profits: Getting Under the Hood of the Ku Klux Klan,” published this fall by the National Bureau of Economic Research, Steven Levitt and Roland Fryer approached their subject from an economic perspective. “We treat the Klan with the same academic detachment that we would treat a study of the latest unemployment report,” says Levitt (co-author of the 2005 best seller Freakonomics). Their conclusion: The terrorist group was primarily a pyramid scheme selling hate and was far more successful at making money than at influencing politics.

The two scholars met in 2000 at the University of Chicago, where Levitt is a professor of economics and Fryer—a Harvard assistant professor of economics and principal investigator at the American Inequality Lab—was completing his dissertation. “One night over beers, [Fryer] told me it was his goal to understand everything that affects the economic life of African-Americans,” Levitt recalls.

They hit upon the topic of the Klan after Fryer read Kenneth Jackson’s 1967 work, The Ku Klux Klan in the City, 1915–1930, which traces the group’s power base to middle-class city dwellers outside the Deep South. Levitt and Fryer knew that in the early 20th century, fraternal organizations like the Elks and the Masons were enormously popular. Could the Klan have had more in common with the fading social clubs described in Robert Putnam’s Bowling Alone than with modern day hate groups?

To penetrate the Klan’s notorious secrecy, the economists scoured archives across the country, digging up membership rolls, robe order forms, and internal audits. These documents were then typed into a database—“we drove at least two research assistants to the brink of insanity,” says Levitt—and cross-referenced with census data. Five years later, the data set included information on 55,000 Klan members from Pennsylvania, Colorado, Ohio, Tennessee, and Montana. The absence of names from the Deep South—due to uncooperative archivists and a lack of documentation—was perhaps the greatest limiting factor.

The research sample showed that the average Klan member was better educated and wealthier than the surrounding population. He was also more likely to see the Klan as a fraternity of sorts than as a violent posse. When the two economists uncovered a trove of expense receipts in Pennsylvania, Fryer says, “I thought maybe we’d find something exciting, like rope or guns, but instead they were buying stuff like ice cream.”

When they examined the Klan’s political influence, Levitt and Fryer were even more surprised. “The Klan was feeding off a nativist sentiment that was already present in the population,” Levitt says. “Politicians backed by the Klan would have been successful even without the Klan.” In Indiana, where Klan-backed candidates dominated state government, the group’s popularity nonetheless had little impact on county-by-county voting for Republicans (the Klan’s party of choice in Indiana).

The Klan was highly effective at one thing, however: making money for its leaders. Rank-and-file members had to pay joining fees, “realm taxes,” and routine costs like robe purchases. Most of this money made its way to the top via an army of “salesmen,” who took their own cut. Levitt and Fryer calculated that in one year, David Curtis Stephenson, the Grand Dragon of Indiana and 22 other states, took home about $2.5 million (in 2006 dollars). “The Klan was able to bundle hatred with fraternity and make a real sell of it,” says Fryer.

The economists’ insights dovetail with what some historians have been arguing for years. “We already know that the Klan was a pyramid scheme,” says Notre Dame’s Rory McVeigh, author of the forthcoming The Rise and Fall of the Ku Klux Klan. Levitt and Fryer’s signal contribution, McVeigh says, is the enormous data set they compiled, a boon to future scholars.

The economists concluded that the differences between the Klan and modern terror organizations were far more numerous than the similarities. “Today’s terrorist organizations seem to be more about generating terror and social change,” Levitt says, “as opposed to the Klan, which looked like a giant Elks club that made people rich.”