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Wednesday, November 1, 2000

Constitutional Protection of Economic Liberty

The Supreme Court Seems Oblivious to the Needs of a Free and Flexible Market

Norman Barry, a contributing editor of Ideas on Liberty, is professor of social and political theory at the University of Buckingham in the UK. He is the author of An Introduction to Modern Political Theory (St. Martin’s Press).

The Supreme Court has been deliberately neglectful of traditional American economic liberties. With the exception of some important protections for property produced in the last 15 years (to be considered later in this article), economic liberties have been at the mercy of the legislature with little or no protection from the judiciary.

While the Court has been anxious to subject legislative intrusions into civil liberty to the most rigorous constitutional standards, this has not been so in relation to, say, contract, the individualistic rigor of which has been significantly diluted. The constraints on legislative action contained in the Fourteenth Amendment have been interpreted substantively, that is, the prohibitions on the taking of life, liberty and property (possibly) without due process of law are thought to protect specific liberties or rights that the states or the federal government (in relation to the original ten amendments) ought not to transgress irrespective of the procedural correctness of the legislation.

Not so with the right to reach a freely negotiated contract with a potential employer.

But this was not always so. In the early part of the twentieth century, the Court was assiduous in its protection of economic liberties; indeed, substantive due process emerged then. The Court was particularly concerned to prevent the police power (not itself in the Constitution) being misused. It should be limited to the prevention of harm and not invoked to promote the morals and well-being of the community (though it sometimes did); such action was especially reprehensible if it interfered with contract. Its endeavors here were not primarily validated by the utilitarian value of the free market but by the Court’s reading of the Constitution and the justices’ understanding of the rights that it embodied.

The apogee of the free-market Court was reached in the famous Lochner decision of 1905 in which liberty of contract, derived from the Fourteenth Amendment, was used to strike down a New York statute that would have limited the hours per week (or day) that a baker could work.[1] This was followed by other decisions that freed the labor market and significantly slowed the pace of the New Deal until 1937 when, under the threat of Roosevelt’s Court-packing plan, the Supreme Court upheld (in West Coast Hotel v. Parrish[2]) a Washington state statute that regulated the pay of female hotel workers.

Equally important was a case the following year (U.S. v. Carolene Products) in which the Court separated economic rights, for example, contract, from civil liberties and disavowed any obligation to subject the former to any serious scrutiny. The latter, however, could not be left to unreliable elected legislatures. It was a doctrine that became the conventional wisdom of the Court and its modern liberal admirers.

Undoubtedly the intellectual foundation for this was provided by Oliver Wendell Holmes’s famous dissent in Lochner. The Court had repeatedly upheld interference with contract under the police power and would do so in the future, he said. The Constitution did not enact Herbert Spencer’s Social Statics. The Court did not think so either; it simply enforced constitutional rights even if they were not enumerated. (Modern liberals “discovered” the right to privacy, but it is not, strictly speaking, in the Constitution.)

Holmes’s strictures have been widely accepted, even by people whom one would have thought to be sympathetic to the reasoning in Lochner. Richard Posner (who pioneered the economic theory of law) refers to Holmes’s “magnificent dissent,” and many free-market conservatives have agreed with the decision’s economics while objecting to the Court’s implicit activism.[3] Yet Posner strongly objected to the egregious Williamson v. Lee Optical decision (1955) in which the Court upheld an Oklahoma statute that reserved spectacle repair work for ophthalmologists and optometrists, severely restricting competent opticians.[4] It was pure protectionism. But maybe Posner’s famed philosophical pragmatism can detect a difference between this case and Lochner, which concerned a statute clearly designed by the big bakers to drive out competition from the smaller, mainly immigrant businesses.

Of course, modern legislatures are riven with interest groups that frequently act against the public good of free competition and the rule of law, and it seems naïve of the modern liberals to entrust them with our economic liberties. Yet prominent modern liberals think there is a philosophical difference between the various liberties (Ronald Dworkin refers to the “stench of Lochner”) and write as if how we earn our living and the contracts we make have no connection with free expression, nondiscrimination, or any other civil right in the litany of “liberalism.” All sorts of individual rights are threatened by majoritarianism or the tyranny of pressure groups.

Current Institutional Weaknesses

Some of us despair of the flimsy guarantees of the familiar parchment protections, and the Constitution does, in its original form, go some way toward nurturing a kind of alternative political action (the exit option) as a protective device for freedom. The United States is a federal system, and under proper competitive conditions individuals can avoid excessive regulation and taxation and enter states that offer more amenable environments. It’s a process that theoretically would probably lead to a reduction in intervention all round, as states would be compelled to compete for citizens by offering easier conditions. The Constitution has the Tenth Amendment, which says that, apart from the responsibilities specifically allocated to Congress, all other legislative responsibilities lie with the states (or the people). But such permissiveness could scarcely survive the New Deal, and the final death knell of competitive federalism was officially sanctioned by the Supreme Court when it said, in Garcia v. San Antonio Metropolitan Transit Authority (1985), that the federal element in the Constitution consisted in the several states’ equal representation in the Senate. In other words, state autonomy did not derive from the Constitution; it was a gift generously donated by Congress with the approval of the Court. The Tenth Amendment is more or less senescent.

There is, of course, little left of the original economic liberty at the center, and where there is, as in freedom for commercial advertising, it is the almost accidental outcome of a favorite civil liberties instrument, the First Amendment. Again, it is perverse decisions by a Court supine before Congress (a position it would never adopt in civil liberties) that is to blame for the erosion of the economic liberties of the Constitution. The major example of this perfidy is its treatment of the commerce clause, which was put in the Constitution to enable Congress to guarantee free trade across state lines. Since the New Deal, however, it has become the means for the central regulation of intrastate commerce. National standards apply everywhere so the value of exit is accordingly reduced. In 1942 Roscoe C. Filburn, who raised a small amount of wheat for his own private use was fined for violating the Agricultural Adjustment Act (upheld in Wickard v. Filburn), which limited wheat production. Apparently his action had a nationwide effect since without it he would have purchased wheat on the open market. If everything affects everything else, there really is no limit to Congress’s powers.

The Court, however, offered a glimmer of hope in a recent case, U.S. v. Lopez (1995), where it refused to enforce a federal gun-control statute (forbidding the carrying of a gun near a school) on commerce clause grounds. The weapon was not imported from another state, and there was a perfectly good state (Texas) law anyway. (Congress rewrote the law to apply only to guns that passed through interstate commerce.)

With regard to liberty of contract, the days of Lochner really do belong to a different century. The Court seems to be oblivious to the needs of a free and flexible market and the imperishable rights on which it depends. Minimum-wage laws and the recent Americans With Disabilities Act are obvious examples of the breach of these simple requirements. However, all is not lost for liberty, for in a series of remarkable decisions in the past 15 years or so, the Court has abandoned its customary abject surrender to legislatures over economic matters and ushered in a new era of the protection of property against the voracious appetites of legislatures, a welcome refusal to accept that economic decisions made by elected representatives are necessarily for the public good.

Property and Land-Use Planning

Liberty of contract may not be specifically protected by the Constitution, but the right to property certainly is mentioned, and the Founders surely intended it some guarantee: the Fifth Amendment says that “private property shall not be taken for public use without just compensation,” and the Fourteenth includes the injunction that no state “deprive any person of life, liberty or property without due process of law.”[5] For those conservatives interested in “original intent,” it is certainly the case that John Bingham, the author of the Fourteenth, believed that the amendment protected property as well as assuring rights for minorities.

However, throughout much of the twentieth century the judicial system offered very little in the way of protection for property. Of course, if a government physically occupied a piece of property (normally, but not only, land) it would have to do so under eminent domain and provide compensation. But sometimes a person’s property could be rendered virtually valueless by a regulatory taking and without compensation. The government has always had power to regulate under the common law of nuisance, but most of the oppressive land-use planning (zoning) was done under the police power. The courts seemed eager to trust public bodies with virtually unlimited power to plan, regulate, and control.

After some significant critical evaluation of state law in the 1920s, in which Justice Holmes played an important part, the pattern was set for most of the rest of the century in Euclid v. Ambler Realty Company (1926), which constitutionally validated zoning. (A village near Cleveland had introduced a zoning ordinance that restricted development of privately owned land to family dwellings.) Here the public interest was elevated virtually to the exclusion of private property rights, and the Court showed an extraordinary deference toward public authority: the ordinance was upheld under the police power. Justice George Sutherland, who wrote the opinion in Euclid, is historically associated with the allegedly free-market Court (pre-West Coast Hotel). Ambler Realty, prohibited from industrial development, lost considerably, as did the community whose use of land was henceforth determined by politicians, not the market. Although some later decisions softened the rigor of Euclid, by the later 1930s, judicial deference to elected bodies had become the norm in all takings cases.

But in the 1980s things changed significantly. In Agins v. City of Tiburon (1980) a challenge to an ordinance actually failed, but the Court still proposed standards, mainly to do with the establishment of legitimate governmental goals that must be met if municipal planning were to succeed constitutionally. In three later cases, the Court applied those norms more or less consistently to the advantage of private property holders and to the detriment of public authorities, which had hitherto been insulated from serious examination of their activities. In Nollan v. California Coastal Commission (1987) Mr. and Mrs. James Nollan wanted a permit to demolish an old cottage they owned and replace it with a two-story dwelling. The Coastal Commission agreed, subject to one condition: the Nollans should dedicate a public easement across their property. On appeal to the Supreme Court, the Nollans won because the justices (Antonin Scalia wrote the majority opinion) ruled that the regulation did not advance common goals; and while the goals may have been legitimate, the means used to achieve them were disproportionate. The “essential nexus” between means and ends had become outright “extortion.”

The next, and most famous, of the recent takings cases was Lucas v. South Carolina Coastal Commission (1992). David Lucas had spent nearly a million dollars on the purchase of beach property that he planned to develop into two vacation homes. Unfortunately, the Coastal Commission later introduced environmental regulations that rendered his investment worthless (although, as was pointed out, not quite worthless; he could still have picnicked on the beach). A lot of issues were involved apart from the question of whether it was a “taking”: for example, was there protection against retroactive laws? Were claims for partial takings admissible (early commentators on Lucas seemed to think not)? Was there protection for investment-backed expectations? And what was the importance of commercial viability?

Lucas won in the Supreme Court and was duly compensated; it was conceded that he had suffered a total economic wipeout, although some of the questions raised were not fully answered. However, it was clear that the Court from now on would be much more searching in its inquiries into the rationale of a regulation. One ironic aftermath of the case was that the Commission later tried to sell Lucas’s former property for vacation home development. The case indicated that the destruction of all investment-backed expectations should not go uncompensated and that a regulation should not eliminate the commercial viability of an asset. Implicit in the Court’s deliberations was the acceptance of the fact that utilitarian value (not that there seemed to be much in the Lucas case) of a regulation should not trump economic rights.

Some questions left unsettled in Lucas were answered by Dolan v. City of Tigard (1994). Florence Dolan, in order to get a permit to extend her electrical and plumbing store, was told that she had to dedicate part of her land to public use (to abate the threat of floods and to provide a bikeway). Dolan’s suit against these requirements was ultimately successful in the Supreme Court, and the decision provided the rationale of compensation for a partial taking; the burden imposed on her for the cost of a public benefit was ruled invalid. Of equal importance was the fact that burden of proof for the necessity of the regulation now lay with the authority. Euclid seems finally to have been buried. Although Nollan and Dolan perhaps have not been unfailingly followed in later cases, it is clear that the takings world is a very different place from what it was once.

Economic Liberties and the Constitution

While all this is encouraging, it would be foolish to imagine that the economic constitution has been rehabilitated. There are vast areas of commercial life that get no protection from the courts, and governments at all levels have pretty much a free hand. Contract law is subject to endless statutory depredations (whatever happened to employment at will?) and arbitrary antidiscrimination law has removed the market from the resolution of many of the most contentious disputes. And I haven’t even mentioned antitrust and its legal and economic absurdities.

It is also worth discussing something mentioned earlier—the hitherto serious dereliction of duty by the judiciary itself in the protection of economic liberties. Is it feasible to expect the Supreme Court to defend economic rights in today’s hostile intellectual environment (as opposed to the public world, which does not entirely consist of graduates from the country’s premier law schools)? A measure of a significant shift in the debate can be gauged in Chief Justice William Rehnquist’s opinion in Tigard: “[we] see no reason why the Takings Clause of the 5th Amendment, as much a part of the Bill of Rights as the 1 st Amendment or the 4th Amendment, should be relegated to the status of a poor relation.” And Scalia and Clarence Thomas have expressed encouraging sentiments about economic rights. But I fear it is a libertarian dream that one day economic and personal rights might be united.


  1. See Bernard Siegan, Economic Liberties and the Constitution (Chicago: University of Chicago Press, 1980), chapter 1.
  2. A decision presaged in Nebbia v. New York (1934).
  3. Richard A. Posner, “The Constitution as an Economic Document,” in Richard A. Posner and Francesco Parisi, eds., Law and Economics (Cheltenham, England: Edward Elgar, 1997), p. 418.
  4. Richard A. Posner, Economic Analysis of Law (Boston: Little, Brown, 2nd ed., 1977), p. 502.
  5. See Bernard Siegan, Property and Freedom (New Brunswick, N.J.: Transaction Publishers, 1997).

  • Norman Barry (1944-2008) was a professor of social and political theory at the University of Buckingham, UK, the country’s only private university.