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Economic Analysis and the Constitution

ECONOMIC ANALYSIS AND THE CONSTITUTION

To what extent do "economic" ideas and concepts better enable us to understand the American Constitution?

One persisting characterization of the Constitution is that it succeeded both in arresting a decline in the American economy occurring under (and because of) the articles of confederation and in initiating an epoch of great prosperity. In reality, the shape of the economy during the 1780s was not particularly unsatisfactory. Indeed, in 1786 benjamin franklin was willing to declare that "America was never in higher prosperity." But deflation injured creditors such as farmers, thereby provoking shays ' rebellion in Massachusetts as well as inducing the enactment by the states of debtors' relief legislation.

The 1789 Constitution authorized the federal government to tax and to regulate commerce and centralized in the national government the power to print money. The long-range economic implications of these particular grants of power have been profound; their short-range consequences, however, may well have been modest. The federal power to tax was lightly exercised for many decades, and the federal power to print money was of limited importance in an era when "monetary policy" had not yet been recognized as a major instrument of national economic policy. The burst of prosperity in the decades following adoption of the Constitution owed largely to a surge in foreign trade, promoted by America's neutrality during the Napoleonic Wars—a neutrality that had been facilitated, to be sure, by the Constitution's recognition of centralized authority over foreign policy.

The first comprehensive "Economic Interpretation of the Constitution" to attract great attention was that of charles a. beard in his celebrated 1913 study. Rejecting the popular view of the Constitution as the noble product of patriotic impulses, Beard assessed the Constitution as an "economic document" designed to advance certain economic interests to the detriment of others. In particular, he believed that "personalty" interests—"money, public security, manufacturers, and trade and shipping"—prevailed at the expense of "landed" interests of farmers and others, as well as at the expense of the unpropertied general public. Beard further asserted that the entire constitutional process had been initiated by a small group of men "immediately interested through their personal possessions in the outcome of their labors." In the preface to his 1935 edition, however, Beard denied that he had meant to suggest that the Framers were merely seeking to enrich themselves personally; rather, Beard explained, the Framers' own economic holdings merely made them receptive to the claims of more general economic groups.

The empirical ambitions that Beard displayed in his research remain commendable. But his particular empirical conclusions have been disputed by more recent scholarship. For example, those attending the constitutional convention owned more in realty than they owned in securities; and it is not clearly true that creditors as a class supported the Constitution's ratification. Those portions of the Constitution that Beard singled out as establishing its economic preferences were the Constitution's general system of checks and balances, which supposedly served to inhibit the unpropertied majorities; Congress's powers over taxation, war, commerce, and public lands; and the prohibitions on state coinage of money and on state impairment of contractual obligations. The due process clause of the fifth amendment Beard barely mentioned—even though the due process clause of the fourteenth amendment had served as the basis for the Supreme Court's notorious decision in lochner v. new york (1905) just eight years previously. Much of Beard's analysis of the Constitution now seems badly forced. In particular, his treatment of checks and balances is extraordinarily reductionistic in its failure to acknowledge that they were designed to serve any purpose other than the protection of certain property interests. In all, Beard's economic interpretation—though a major event in constitutional historiography—no longer commands adherents.

Economists have long been concerned with the objective of economic efficiency, and modern economists have developed an elaborate analysis in support of this objective. Might it be that the goal of efficiency has constitutional status? Insofar as original intent is relevant, information is needed on the economic views of the Framers. One philosophy common in eighteenth-century America was classical republicanism, which, in commending community, equality, and public virtue, was capable of disparaging commercial activity. The Framers, however, were also exposed to the newer tradition of Lockean liberalism, which strongly endorsed individualism and commercial activity. Propitiously, Adam Smith's The Wealth of Nations was published in 1776, the year of the declaration of independence. Consistent with Smith's free market approach, alexander hamilton in the federalist #11 espoused the idea of an open national economy: "The veins of commerce in every part will be replenished and will acquire additional motion and vigor from a free circulation of the commodities of every part." Hamilton began that paper with the observation that "the prosperity of commerce" is "a primary object of [enlightened statesmen's] political cares"—an observation that evidently contemplated mercantilist, rather than laissez-faire, policies. In The Federalist #10, james madison made clear that he was hardly an economic egalitarian. "The first object of government" is to protect "the diversity of faculties of man, from which the rights of property originate." Elsewhere, however, The Federalist set forth theories that were imbued with republicanism; and in a 1792 essay Madison recommended policies that would "raise extreme indigence towards a state of comfort." In all, the free market interests of the Framers should neither be ignored nor exaggerated.

From the early nineteenth century on, free-market norms have exerted their most continuing influence upon constitutional doctrine through the negative underside of the commerce clause. According to Justice robert jackson in H. P. Hood & Sons v. DuMond (1949), "Our system … is that every farmer and every craftsman shall be encouraged to produce by the certainty that he will have free access to every market in the nation, that no home embargoes will withhold his exports, and that no foreign state will by custom duties or regulation exclude them. Likewise, every consumer may look to the free competition from every producing area in the Nation to protect him from exploitation by any." The Supreme Court has frequently endeavored to protect out-of-state sellers, outof-state buyers, and multistate transportation concerns from discriminatory or excessive burdens imposed by self-interested state governments. In southern pacific company v. arizona (1945), for example, the Court invalidated an Arizona statute limiting the lengths of trains operating in Arizona: the Court found that the statute's burdens on interstate commerce were substantial, its safety benefits probably trivial. At times, however, the Court has been reluctant to intervene even when the prospect of Justice Jackson's "exploitation" has seemed keen. If a state enjoys a monopoly on an important natural resource, then the state, by imposing a substantial tax on the extraction of that resource, can "export" its tax burden, enriching its local treasury at the expense of consumers throughout the nation. Yet in Commonwealth Edison Company v. Montana (1981) a divided Supreme Court declined to hold that Montana's thirty percent severance tax on coal violated the commerce clause. The Court majority did not clearly disagree with the proposition that an "exported" state tax violates commerce clause ideals if it is not "fairly related to the services provided by the state." But the majority seemed to regard it as beyond the judicial function to assess the incidence of such a tax and to compute the value of those state-provided "services." (See state regulation of commerce.)

Though the commerce clause imposes some limits on the states, its primary and explicit purpose is to confer powers on the federal Congress. In gibbons v. ogden (1824) the Court, in expansively interpreting what counts as interstate commerce, upheld a congressional enactment that implicitly abrogated a New York rule creating a steamboat monopoly between certain New York and New Jersey ports. Because this monopoly plainly offended freemarket norms, the federal statute in Gibbons vindicated what Justice Jackson in Hood regarded as the "vision of the Founders." But what would the result have been in Gibbons had it been Congress, rather than the state, that had insisted on a monopoly? In exercising its commerce clause powers in the twentieth century, Congress has frequently chosen to restrict rather than enhance the competitive process. What is noteworthy is that the Supreme Court has found this in no way problematic. Justice Jackson's opinion in wickard v. filburn (1942) was shrewd in its perception of how intra-farm (and hence intrastate) events could have an aggregate impact on interstate economic arrangements. But the opinion was strikingly uninterested in the extent to which the federal statute it was approving brought about the cartelization of the otherwise highly competitive agricultural economy, thereby curtailing production and elevating consumer prices. Perhaps the point is that the "vision of the Founders," as understood by the Court, is not a competitive economy as such, but merely an economy free of anti-competitive restrictions imposed by the states. Besides accounting for the assumed irrelevance of free-market norms to congressional action under the commerce clause, this attribution of purpose can also explain the fact that the negative underside of the commerce clause has never been thought directly applicable to private monopolies that might severely restrict competition. Consider, however, Paul Freund's view that the spirit—though not the letter—of the commerce clause anticipates a "free national market," and that the commerce clause therefore needs to be supplemented by a strong federal antitrust program.

In the first third of the Twentieth Century, the Court did engage in a rather broad-ranging implementation of free-market values. The Court proceeded primarily in the name of the due process clauses of the Fourteenth and Fifth Amendments, clauses which enabled it to review all state and federal legislation, without regard to interstate impacts. During these years, the quite sophisticated approach of an Adam Smith was frequently replaced by the insensitive dogmatism of the Social Darwinist movement, thereby provoking Justice oliver wendell holmes'sLochner quip that "the Fourteenth Amendment does not enact Mr. Herbert Spencer's Social Statics." Since 1937, by contrast, the Court has consistently declined to invalidate "economic" legislation on substantive due process grounds and has stubbornly refused to subject that legislation to even minimal review. In williamson v. lee opticalco. (1955), for example, the court unanimously and unhesitatingly upheld an oklahoma statute requiring consumers to employ a licensed doctor merely in order to fit old eyeglass lenses into new frames.

Judicial tolerance of inefficient economic enactments is probably for the best. Economic analysis is an acquired taste; courts should not insist that legislators be educated in basic economic concepts, let alone that they keep abreast of the current literature on externalities and public goods. Moreover, most economists would acknowledge that a legislature might properly choose to sacrifice economic efficiency in order to achieve some desired distribution of wealth among societal groups. Also, even if certain private conduct is economically acceptable, a legislature could properly conclude that the conduct is interpersonally unfair in the particular way it enables A to cause harm to B.

Nevertheless, the argument favoring somewhat greater judicial scrutiny of inefficient legislation is not altogether without merit. In Lynch v. Household Finance Corp. (1972), a procedural due process case, the Court—drawing on John Locke, John Adams, and william blackstone—recognized an important connection between property and liberty. In addition, recent "commercial speech" cases such as virginia state board of pharmacy v. virginia citizens consumer council, inc. (1976) have attached considerable constitutional significance to marketplace norms. Moreover, aggressive judicial review is often defended on the ground of its ability to correct predictable breakdowns in the legislative process. Southern Pacific itself relied, for commerce clause purposes, on the Court's idea that out-of-state railroads are likely to be unrepresented in the state's legislative processes. For due process purposes, "consumers" as such are anything but a discrete and insular minority. But—as an economic analysis of the legislative process lucidly suggests—the very diffusion of consumers throughout society signifies that consumers may fare poorly in the legislature when challenged by producer groups, which are far better able to mobilize themselves in seeking protective legislation.

In any event, given the Supreme Court's position that neither the commerce clause (as a grant of power) nor the due process clause (as a restriction of power) includes any significant free-market content, it appears likely that Congress, if it chooses, could enact socialism (the ultimate rejection of market values) as this country's form of economic organization. It seems hard to deny that Congress could offer a rational basis on behalf of a socialist program that would satisfy the trivial demands of the commerce and due process clauses. To be sure, the takings clause would require that the nationalization of industry achieve a public use. But recent interpretations of the public use doctrine make it doubtful that the doctrine places any limits on Congress's choice of economic philosophy.

It is true that the takings clause would require Congress to afford just compensation to the shareholders of any companies nationalized. As a general matter, the just compensation requirement serves to rule out at least certain legislative efforts to redistribute wealth, whether by socialism or by more modest measures. It should not be forgotten that the progressive federal income tax—a central feature of federal policy during the last forty years—required for its legality a constitutional amendment. Still, the Supreme Court's invalidation of a pre-amendment federal income tax in pollock v. farmers ' loan & trust company (1895) rested on a dubious interpretation of the direct taxes clause. Consider, moreover, a general tax on wealth or property, the proceeds of which are dedicated to financing welfare programs: it seems entirely clear that such a tax would not constitute a prohibited "taking." It appears, then, that wealth redistribution is constitutionally quite acceptable so long as it is both candid and evenhanded.

When a "taking" does occur, the "just compensation" that the takings clause requires has long been defined in terms of "fair market value." This "fair market value" gloss introduces, almost by hypothesis, certain capitalist values into constitutional doctrine. Yet that gloss can also be critiqued precisely from a free-market perspective. Assume a neighborhood of homes which, if individually available for sale, would each yield a price of $100,000. At any one time, however, only a limited number of houses are in fact offered for sale. To state that a homeowner is not interested in selling for $100,000 is to acknowledge that he presently values his ownership of the house at some figure in excess of $100,000. That excess is what economists call "consumer surplus." "Fair market value" provides less than full compensation in that it deprives the homeowner of this consumer surplus. From an ethical perspective, compensation that is less than full is arguably less than "just." Moreover, economic analysis can make clear that a "fair market value" standard for compensation has the practical effects of subsidizing government in its land acquisitions (by negating consumer surplus) and distorting government eminent domain choices (by encouraging government to ignore variations in consumer surplus among property owners).

Yet an economic analysis also verifies that the problem of measuring full compensation resists easy solution. Rendering consumer surplus compensable would not be satisfactory: consumer surplus would be notably difficult to quantify on an individual basis, and compensability would invite owners to dissemble in representing their surpluses' magnitude. Reminded of the difficulties involved in establishing the proper price for an eminent-domain forced sale, an economist might question the very practice of forced sales: he might suggest that the government be deprived of the eminent domain power altogether, thereby remitting the government to the opportunities afforded by the ordinary real estate market for purposes of acquiring land. Yet it is precisely the economist who can explain why this solution, too, would not always be satisfactory. Without the government's power of eminent domain, the owner of the final parcel within a tract of land that the government has otherwise succeeded in acquiring would be in a position—knowing of the government's situation—to extract an excessive monopoly price from the government-buyer. Because governments engage in tract acquisition more frequently than private parties do (only governments build superhighways, for example), it may make sense to limit the eminent domain power to governmental bodies. Obversely, the fact that the eminent domain power is generally limited to governments helps explain why private parties often are not in a good position to initiate large-tract projects.

As suggested above, an economic analysis is at least able to deepen understanding of the implications of constitutional doctrine. Correspondingly, such an analysis can correct what would otherwise be misunderstandings. In shapiro v. thompson (1969), for example, the Supreme Court considered the states' argument that welfare benefits can be properly be denied to indigents who move into a state in order to collect higher benefits. Such an argument, the Court suggested, rested on the implicit premise that such welfare applicants are not "deserving"—a premise that the Court then rejected as unsound. But from the economist's useful perspective, the problem is not the grantee's desert but rather the grantor's incentives. States, anticipating an influx of indigents if welfare benefits are increased, may be dissuaded from raising those benefits, a dissuasion that might ill serve whatever the public's preference may be for compassionate welfare programs. Given an economic point of view, Shapiro unwittingly reduces the feasibility of state-administered welfare programs, thereby strengthening the argument in favor of the nationalization of welfare.

At the minimum, economic analysis can assist in identifying the costs or inefficiences of any proposed constitutional ruling. It is, of course, for the courts then to determine what weight to accord these costs in interpreting constitutional doctrine. The economist would be disturbed, however, by any disparagement of these costs that seems naive or inadequately considered. In Shapiro, for example, there is language stating that administrative inefficiencies, no matter what their magnitude, are automatically "uncompelling" for purposes of strict scrutiny review. But it is far from clear that the Court really adheres to such a position. In recent procedural due process opinions such as mathews v. eldridge (1976), the Court has taken the efficiency criterion significantly into account.

In a number of important ways, then, an economic analysis can be clearly beneficial in the process of constitutional analysis. Nevertheless, economics will probably never achieve, in constitutional studies, the influence that it has secured in certain other fields of law. There are too many constitutional doctrines that endorse ideas or values that are largely beyond the economist's jurisdiction. To employ an extreme example, the economist's recognition of people's "taste for discrimination" is of little help in understanding the Constitution's moral assessment that racial discriminations are inherently invidious.

Gary T. Schwartz
(1986)

Bibliography

Beard, Charles A. (1913) 1935 An Economic Interpretation of the Constitution. New York: Macmillan.

Elliot, B.W. (1941) 1979 Dynamics of Ascent. New York: Knopf.

Epstein, David F. 1984 The Political Theory of the Federalist. Chicago: University of Chicago Press.

Epstein, Richard A. 1985 Takings. Cambridge, Mass.: Harvard University Press.

Freund, Paul A. 1961 The Supreme Court of the United States. Cleveland, Ohio: World Publishing Co.

Goldwin, Robert A. and Schambra, William A., eds. 1982 How Capitalist Is the American Constitution? Washington, D.C.: American Enterprise Institute.

Lee, Susan P. and Passell, Peter 1979 A New Economic View of American History. New York: Norton.

Mcdonald, Forrest 1979 We the People: The Economic Origins of the Constitution. New York: Samuel Insull.

Posner, Richard A. 1977 Economic Analysis of Law. Boston: Little, Brown.

Wood, Gordon S. 1969 The Creation of the American Republic, 1776–1787. Chapel Hill: University of North Carolina Press.

Wright, Esmond 1978 Fabric of Freedom 1763–1800. New York: Hill & Wang.

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