Streetwise Professor

October 17, 2011

Is the Constitution of Liberty Credible?

Filed under: Economics,Politics,Regulation — The Professor @ 5:30 pm

It seems like forever ago, but it was only 2010.  That year I wrote about the Citizens United case, in which the Supreme Court established that corporations–like individuals–had speech rights.  The post responded to criticisms of the decision, notably in the Stevens dissent, that cited the Founders trenchant criticism of corporations.  I noted that the corporations that the Founders–and Adam Smith–criticized were a far different thing than the modern corporation.  They were established by the crown–political favors to the politically connected.  They were a part of a “closed order” in which only a select few had access to power and wealth.  I further noted that as John Wallis has pointed out (in his work with North and Weingast on the natural state), the idea of the corporation was fundamentally transformed in the mid-19th century.  In particular, states ceased making corporations special privileges awarded to the few.  Instead, states created an “open order” in which anybody could incorporate.  Corporations in an open access system are fundamentally different than those in a closed access one.

I agree with Professor Bainbridge that in the open order system, corporations have become incredible engines for the creation of wealth.  But that very success has had perverse political economy consequences.  Large, powerful, and wealthy  corporations can undermine the open order, and use their wealth and influence to receive benefits like those conferred by crowns on the corporations they created.  That is, a true open order may be unsustainable.  It bears within it the seeds of its own destruction.

Andrei Shleifer argues that regulation was adopted in the late-19th and 20th centuries precisely because the power of corporations had undermined the independence and impartiality of the courts.  Large corporations could suborn justice, and Progressives believed that the countervailing power of the regulatory state could restrain this process: the view was that the state was harder to suborn than a judge.

But regulation is not immune from being suborned.  Indeed this is the essence of the Chicago/Friedman/Stigler critique of regulation: regardless of its original or stated intentions, regulation typically confers a benefit on a powerful entity, more often than not a corporation or group of corporations. Progressive intentions to tame corporations led to an expansion of government power that was used to benefit them.  The master became servant.

This classical liberal (libertarian) critique is all the more compelling today: corporatism has grown apace with the growth of the power of the state that began in the Progressive era.  The classical liberal/libertarian response to the suborning of the regulatory state is quite straightforward: sharply limit the power of the government to regulate, thereby constraining its ability to confer rewards on the powerful.   As I said in the previous Occupy This post, corporatism requires two to play: corporations and the government.  The libertarian remedy for corporatism is not to constrain corporations in the economic sphere, but to constrain government in its ability to aid corporations (often in the guise of “public interest”).  In the classical liberal/libertarian view, this preserves the open access order, and permits corporations to achieve the economic benefits that Professor Bainbridge lays out so nicely.

But there is a nagging question: are constraints on the power of the state to confer rewards credible?  The economic benefits to concentrated interests from government intervention can be immense.  How is it possible to constrain credibility the ability of these interests to “buy” these benefits from politicians and regulators?  They are willing to pay so much, and the diffuse interests who are victimized cannot outbid them: politicians go to the highest bidder. Is it possible to prevent the auction from occurring at all?

A Stigler, or a Mancur Olson, would probably say no: it is like trying to prevent water from flowing downhill.  It will work relentlessly, and eventually erode or circumvent anything in its way.  There is not a political system that empowers the government to provide public goods or to exercise police powers that is immune to having those powers seized by rent seekers.

So what is the alternative?  Increasing government powers–the Progressive/progressive/Occupy This prescription–is completely counterproductive.  The idea of the state as countervailing power is completely chimerical, because the state is suborned by private interest: increasing its powers will only exacerbate the problems of corporatism.  A Constitution of Liberty (to appropriate Hayek’s phrase) is attractive, but likely unsustainable.

So what is a practical political program?  Perhaps the only real alternative is to wage a continuing war against the ceaseless action of the waves, like the Dutch battling the seas with their dykes and dams, knowing that some water will seep through, and that sometimes the dykes will give way.  A Constitution of Liberty is a leaky bulwark, but it is better than the alternative: to follow the progressive prescription would be to open the sluices, unleashing the deluge.

Not a happy conclusion, but methinks a soberly realistic one.

Update.  Here’s another way to state this.  I pretty much agree with Mark Pennington’s defense of classical liberalism against “market failure” arguments, communitarianism, and egalitarianism.  I am skeptical, however, about the real prospects for a “robust political economy” (the title of his book) on classical liberal lines.

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  1. In the long run I’m optimistic that moral progress will make smaller, less intrusive government more sustainable. Imagine Pinker’s argument about the decline of violence, a kind of moral progress story, writ large to encompass a wide range of changing (for the better) attitudes about property, persons, and conscience. Not necessarily a straight line trend of improvement from now to then, but over a very long history the trends are positive.

    Of course we imagine we are historically special, uniquely powerful against the tide of history, and this time it is different from the trend of millennia, but I’m not so sure we have grasped securely the nape of history (to swith metaphors mid-stream) and turned it on its heels. More likely, we continue on the same bumpy ride of the past thousands of years, only at an accelerating rate of improvement. (More metaphor switching, I really should get my story straight.)

    I also like Pennington’s analysis in Robust Political Economy, but agree that it is a better defense than it is a plan of attack.

    Comment by Mike Giberson — October 17, 2011 @ 10:05 pm

  2. Thanks for the comment, Mike. I guess we’re pretty much in agreement. My basic point is that there is no magic formula for the creation of a robust political economy that supports a truly open access, classical liberal order. It is a constant battle, just like the Dutch with the dykes.

    In the broad sweep of history, yes, remarkable progress has been made in the direction of greater liberty: I think that’s your point. Scoping down to more recent times, there has been backsliding with periods of resurgence: Progressivism was followed by a relatively laissez faire 20s, followed by the New Deal and a long statist interlude, interrupted by Reagan/Thatcher, with backsliding commencing with Bush and accelerating dramatically with Obama. So I guess optimism or pessimism depends in large part on your frame of reference. Take a very long view, as you do, and as Pinker does, there is cause for optimism. A shorter term view, not as much.

    The ProfessorComment by The Professor — October 18, 2011 @ 8:50 am

  3. It seems to me that the easiest answer is that as creations of the state, the government should just limit what powers and actions corporations are able to do as part of the process of incorporation. Therefore, if we don’t want corporations to have the same freedoms of speech as real people, it’s quite easy.

    My understanding is that this was quite common before the Gilded Age, but that the ability of states to confine what corporations could do was taken away when the Supreme Court ruled that corporations were actually “persons with constitutional rights” which is simply absurd. This was a flagrant act of corruption by the Supreme Court. In an idea world, they’d simply say, “We screwed up real bad” but lawyers don’t tend to do that. We may simply need a constituional amendment that clarifies that constitutional rights apply only to living beings, and that government created “persons” can be restricted in what they are able to do. If the benefits don’t outway the risks, then people just wouldn’t utilize them.

    Because states are the ones who establish corporations – especially Delaware – there may need to be language that specifically prohibits certain actions so that one state doesn’t ruin it for the whole country. In any case, there are lots of issues to consider, and we’d need to be careful about the wording to prevent the most flagrant abuses, allow flexibility, and keep it useful as an engine of economic growth.

    Such restrictions would need to apply across all such bodies – it shouldn’t be possible to get individual exemptions. Possibly, there could be different levels of such bodies with varying restrictions based on some criteria – much like how levels of liability depend on whether a business is a single proprietership, partnership, LLC, or corporation – but it would need to be made available equally to everyone.

    Comment by Chris Durnell — October 18, 2011 @ 11:03 am

  4. Chris–I have a different take. Read the chapter in North, Wallis, Weingast’s Natural State book that deals with the development of corporation law. The basic story is that pre-Gilded Age, corruption in the chartering of corporations (which required special legislative acts) led to the movement to an open access type of system in which there was default issuance of corporate charters to anyone who applied and paid a nominal fee. The confining of corporations, as you phrase it, was hardly an act of public spiritedness. It was the essence of an essentially corrupt system.

    Corporations cannot do whatever they want. They are subject to statutory and common law, including tort, contract, etc. There are mechanisms to punish malfeasance.

    The problem, IMO, arises from the ability of the state to confer advantages on existing corporations (esp. large ones) in the form particularly of various obstacles and barriers to competition.

    The ProfessorComment by The Professor — October 18, 2011 @ 12:38 pm

  5. In the long run, either we will have a technological singularity and dematerialization of production; or a transition to a sustainable path of development with strict regulations on pollutants emissions and resource usage; or a Malthusian collapse and reversion to feudalistic forms.

    All three imply the doom of liberal capitalism. The only relevant question will be the one originally asked by Rosa Luxembourg: will it be followed by socialism or barbarism?

    Comment by Sublime Oblivion — October 18, 2011 @ 7:51 pm

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