All Commentary
Sunday, July 1, 1984

The Constitutional Crisis: An Historical Perspective



Plenty of good land and liberty to manage their own affairs in their own way, seem to be the two great causes of the prosperity of all new colonies. In the plenty of good land the English colonies of North America, though, no doubt, very abundantly provided, are, however, inferior to those of the Spaniards and Portuguese, and not superior to some of those possessed by the French before the late war. But the political institutions of the English colonies have been more favorable to the improvement and cultivation of this land, than those of any of the other three nations.[1]

As Smith pointed out, America began not only with an abundance of resources, but more importantly, with a set of political institutions that had evolved over centuries in England. As citizens of the British Empire, Americans enjoyed property rights embodied in the British constitution and defined and enforced through common law. The origins of those property rights can be traced back to the Magna Charta in 1215, which states that no freeman “shall be arrested or detained in person, or deprived of his freehold, or outlawed, or banished, or in any way molested . . . unless by the lawful judgment of his peers and by the law of the land.” The precedent for limited government was established in the Statute of Monopolies when the British Parliament limited the power of the crown to create legal monopolies. From the Glorious Revolution of 1688 emerged a set of political institutions based upon a constitution and representative democracy.

British citizens, including the American colonists, enjoyed property rights that were defined and enforced through a system of common law that had also evolved over centuries. American courts referred to common law precedents in Black-stone to define and enforce individual property rights. In Blackstone, property rights are vested in the individual by the immutable laws of nature before they enter a constitutional contract to form a civil society; the law “will not authorize the least violation of it; no, not even for the good of the whole community . . . the right of property is founded in the law of nature, and it is antecedent to all civil regulations.”[2]

Underlying these political institutions of constitutional government and common law was the ideology of classical liberal political economy as developed in the writings of Hobbes, Locke, Rousseau, Burke, and others. The Lockeanconcept of natural rights and social contract was the foundation for British law translated to the American setting.

The American colonists, in fact, enjoyed property rights that were more clearly defined and enforced than for countrymen in England, as revealed by property rights in land. As Adam Smith observed,

But in all the English colonies the tenure of the lands, which are all held by free socage, facilitates alienation, and the grantee of any extensive tract of land, generally finds it for his interest to alienate, as fast as he can, the greater part of it, reserving only a small quitrent.[3]

Free and common socage meant that the owner of the land could will, lease, or sell the land as he chose. He might have to pay certain incidents or taxes on the land, but those payments had to be fixed and certain and no new obligation could be imposed upon him. After the Revolution the right to impose taxes on the land was vested in the state, and traditional feudal obligations and constraints on the landowner were abolished. From a system of free and common socage evolved the fee simple form of land ownership.

Fee simple was the clearest definition of property rights giving the individual the maximum freedom to use the land, sell it, or pass it along to his heirs, unencumbered by obligations or constraints upon his rights of ownership which still persisted in Europe. This property right in land provided individuals with an incentive to utilize the land in productive ways, facilitated the rapid development of our natural resources, and established the institutional framework for the small family farm which predominates in American agriculture down to the present day.

Unprecedented Freedom

The freedom to enjoy those property rights depended upon constitutional constraints on the power of government to intervene in economic affairs. The American colonists enjoyed an unprecedented freedom from government taxation and regulation of their affairs; indeed, this period in American history can be described as an anarchistic utopia. While the British had an elaborate system of taxation and regulation embodied in the British Navigation laws, the American colonists successfully ignored and circumvented those laws. The American Revolution was triggered by British efforts to enforce these taxes and regulations.

After the Revolution, Americans probably would have preferred to return to the anarchistic utopia they had enjoyed in the early colonial period, but the necessity for a constitutional contract establishing at least a limited central government had been revealed during the war and post-war years. The Federalist Papers written to support ratification of the Constitution convey the ideological foundations for this fundamental institution in classical liberal political economy. The concept of property rights was embodied in the 5th Amendment, that a person shall not be deprived of “life, liberty or property without due process of law.” Americans interpreted these property rights in very broad terms as revealed in the writings of Madison:

This term [property] in its particular application means “that dominion which one man claims and exercises over the external things of the world, in exclusion of every other individual.” In its larger and juster meaning, it embraces everything to which a man may attach a value and have a right, and which leaves to everyone else the like advantage. In the former sense, a man’s land, or merchandise, or money, is called his property. In the latter sense, a man has a property in his opinions and the free communication of them. He has a property of peculiar value in his religious opinions, and in the profession and practice dictated by them. He has property very dear to him in the safety and liberty of his person. He has an equal property in the free use of his faculties, and free choice of the objects on which to employ them. In a word, as a man is said to have a right to his property, he may be equally said to have a property in his rights.[4]

Property rights were also protected by specific constitutional constraints on the power of government. In addition to the due process clause, the Constitution specifically prohibits retroactive laws and requires that laws affecting private property, such as laws of taxation, be general and uniform. The contract clause placed limitations on the power of the government to interfere with contracts between the state and the individual as well as contracts between private individuals. The commerce clause restricts federal government regulation to interstate commerce, reserving regulatory powers over intrastate commerce to the individual states. Property rights were also protected by the broader provisions of the Constitution reserving powers to the states, and establishing separation of powers in the different branches of government.

Equal Opportunity Meant Equal Protection Under the Law

In the early 19th century, the Supreme Court established the neutrality of the Court and the supremacy of the Court in adjudicating constitutional issues. In a series of decisions, the Supreme Court defined the various provisions of the Constitution so as to more clearly define and protect the property rights of American citizens. American society was governed by a rule of law which protected the property rights of a citizen from coercion by government as well as by his fellow citizens. A person’s actions were judged to be legally permissible, not by reference to whether they yielded benefits or losses to society, but whether they violated the rights of others in the society. Equal opportunity meant equal protection under the law.

It should not be surprising to find that the 19th century witnessed rapid economic growth and development. Within this institutional framework,’ Americans had the greatest freedom to maximize their individual welfare and in the process maximize the welfare of the society as a whole. This was reflected in rapid growth in population and westward expansion, high and sustained rates of growth in income per capita, and improvements in standards of living.

Rapid economic growth was also accompanied by greater inequalities in the distribution of income and wealth. One could identify a group of wealthy citizens, a larger middle class, and a number of Americans living in what Henry George referred to as vice and misery. In his book, Progress and Poverty, George called for the redistribution of wealth to achieve a more egalitar ian society.[5] Reinforcing these sentiments was a utilitarian ideology developed by Bentham and others. The presuppositions of classical liberalism were replaced by utilitarianism, i.e., improving social welfare by maximizing the greatest good for the greatest number.

For Bentham and other utilitarians, the calculus of pleasure and pain could be refined into a rationale for legislation and adjudication. Of course, this required some definition of social welfare that would take precedence over individual property rights, and political economists were quick to offer such definitions in terms of an egalitarian society, rapid economic growth, and other visions of social progress. The new philosophy of empiricism seemed to establish utilitarianism as a scientific approach to human affairs analogous to the developments taking place in the physical and natural sciences.

Special Interests

Within this ideological environment, changes began to occur in American institutions. Various interest groups began to look upon government, not as a set of institutions to guarantee individual property rights, but rather as an institutional arrangement to be used to benefit their narrow interest group. Farm organizations such as the Grange, labor unions, and business interests successfully lobbied for special interest legislation, and government at both the state and national level responded with an unprecedented array of taxes and regulations that conflicted with in dividual property rights.

The crucial question was whether the courts would legitimize this change in the rules of the game or continue to protect individual property rights under the Constitution. The courts did not suddenly abandon their role as a neutral arbiter on constitutional issues, but they did begin to redefine the Constitution in ways that permitted an expansion in the powers of government, resulting in an erosion of individual property rights. While this change in the rules of the game occurred over a long period of time, one can identify the case of Munn v. the State of Illinois in 1877 as the landmark decision.

In response to the Grange influence, the state of Illinois passed legislation fixing the rates charged by grain elevators. Munn, who was a grain elevator operator, challenged the regulations as a violation of his property rights under the due process clause of the Constitution. In upholding the regulatory power of the state government, the Supreme Court introduced a doctrine that would have a profound effect on property rights in this country. The Court ruled that property cloaked with the public interest may be subject to control for the common good.

In subsequent decisions, the Court continued to protect private property rights under what is defined as substantive due process. The courts legitimized government regulation that infringed upon private property rights, but they maintained that such regulation must be reasonable. Before the state could infringe upon private property rights, it was required to demonstrate that the ends were justified and that the specific government legislation was a reasonable means to that end. For example, railroad rates could be regulated, but the state was required to show that the regulated rates were not unduly confiscatory but were reasonable. This required that the courts interpret the reasonableness of legislation with respect to the ends and the effectiveness of the legislation in achieving those ends.

The “Rule of Reason”

This “rule of reason” left a wide scope for judicial interpretation depending upon the point of view of the justices, which of course changed over time. While the decisions of the justices were often conflicting and arbitrary, the courts negated a wide range of legislation that did not satisfy the rule of reason. Thus, the courts continued to function as an independent judiciary protecting economic liberty under the Constitution during the half-century of substantive due process up to the 1930s.

The Great Depression brought fundamental changes in American institutions. Farmers, workers, and businessmen all turned to the government for aid in the economic crisis. The Roosevelt administration responded with the New Deal calling for government regulation of virtually every aspect of economic activity. The National Recovery Act established government controls over most manufacturing industries, regulating prices and output. The Agricultural Adjustment Act imposed similar controls over the agricultural sector. Banking and financial institutions were subject to a wide range of government regulations. The Tennessee Valley Development Act brought the government into direct competition with private utility companies. The Wagner Act shifted the government to the support of labor unions as collective bargaining agents in labor markets. Governmental transfer activities expanded at an unprecedented rate through employment programs, welfare programs, social security, and unemployment insurance.

This decidedly collectivist shift in our institutional framework was defended on pragmatic grounds. The architects of the New Deal argued that we could no longer rely on laissez-faire institutions based upon private property rights; the problems of the Great Depression required a governmental solution. The philosophy of pragmatism developed by Charles S. Peirce, William James, and John Dewey provided ideological underpinnings to this pragmatic approach to government policy, and the political economy of John Maynard Keynes provided an economic rationale for the expanded role of government in the economy. But the crucial question in the 1930s was how the Court would deal with the new legislation.

The initial response of the Supreme Court was to negate much of the New Deal legislation on the grounds that it violated the Constitution. However, in the late 1930s, the Court reversed itself, sanctioning New Deal legislation which it had earlier declared unconstitutional. Legal scholars still debate the causes for this shift in the Court’s position. Certainly, the political pressures of the Great Depression, and more specifically Roosevelt’s Court packing scheme to change the composition of the Court, must have influenced the justices. Yet the shift in judicial interpretation must also be understood in the context of the erosion in private property rights that had occurred since the late 19th century.

Abdication of the traditional role of the Court in judicial review of economic legislation was justified on the grounds that economic liberties are subject to a lower standard for judicial review than personal liberties. In the words of Justice Douglas:

We are not concerned, however, with the wisdom, need or appropriateness of the legislation. Differences of opinion on that score suggest a choice which should be left where it was by the Constitution . . . to the states and to Congress . . . There is no necessity for the state to demonstrate before us that evils persist despite the competition which attends bargaining in the field. In final analysis the only constitutional prohibition or restraint which respondents have suggested for the invalidation of this legislation are those notions of public policy embedded in earlier decisions of this court, but which, as Mr. Justice Holmes long admonished, should not be read into the Constitution. Since they do not find expression in the Constitution, we cannot give them continuing vitality as standards by which the constitutionality of the economic and social pro grams of the states is to be determined.[6]

The Rational Relation Test

What emerged from this judicial interpretation was the rational relation test requiring minimum scrutiny of economic legislation. Any legislation can pass this minimal standard for judicial review if it does not impinge upon the personal rights defined in the first amendment and has some rational relation to a public purpose. Since every economic regulation has some rational relation to a public purpose, the rational relation test has meant judicial withdrawal from further review of legislation, even when it violates individual property rights, imposing severe economic burdens on the individual. Since the 1930s, the Court has not invalidated a single piece of economic legislation on Constitutional grounds. A virtual explosion in legislation has established a ubiquitous role for government in the economy sanctioned by judicial abdication in reviewing that legislation.

This change in the rules of the game has had a profound impact on the institutional framework of the American economy. The expanded role for government has created even greater incentives for transfer activities as opposed to productive activities. As more resources have been allocated to transfer activities through the public sector, the productivity and wealth of the society has diminished. In spite of this shift from productive activities to transfer activities, the economy has continued to experience growth and development.

In the words of Adam Smith, “the uniform, constant, and uninterrupted effort of every man to better his condition, the principle from which public and national, as well as private opulence is originally derived,” has been “powerful enough to maintain the natural progress of things toward improvement, in spite of both the extravagance of governments and of the greatest errors of administration. Like the unknown principle of animal life, it frequently restores health and vigour to the Constitution, in spite, not only of the disease, but of the absurd prescriptions of the doctor.”[7]

Changing Rules of the Game

Recent]y, economists have questioned whether our society will continue to prosper in an institutional framework which motivates people to engage in transfer activities rather than productive activities. More importantly, they have challenged the change in the rules of the game that gave rise to these transfer activities. It is clear that the writers of the American Constitution incorporated a concept of property rights which included economic liberties as well as personal liberties. Over the first century of our history, the courts functioned as an independent judiciary interpreting the Constitution so as to protect individuals’ economic as well as personal liberties. In the last century and especially since the 1930s, those property rights have been eroded as the courts abdicated their role in subjecting economic liberties to a lower standard of judicial review than personal liberties.

The modern heirs of classical political economy such as James Buchanan and Gordon Tullock, have developed the public choice paradigm built upon the Lockean presupposition of natural rights and social contract. In the public choice paradigm, there is no constitutional basis for a dichotomy between economic liberty and personal liberty; indeed, it is difficult to perceive of a society in which individuals enjoy one set of property rights without the other. The freedom to do material things is just as important as freedom of expression and other personal liberties.

How Americans resolve this controversy over the economic provisions of the Constitution will have a profound impact upon the future of the society. Some political economists, such as Milton Friedman, argue that property rights have been so eroded over time that the only course of action to secure those rights is through constitutional amendment. Yet a constitutional convention organized to incorporate an economic bill of rights into the Constitution could easily lead to changes in the Constitution that would destroy individual property rights rather than secure them.

For those of us unwilling to take that risk, an alternative course of action appears more viable. We can enact rules to limit federal government spending and taxation as we have done at the state and local level. We can demand the withdrawal of government from antitrust, and regulatory activities, that infringe upon private property rights. We can substitute private enterprise for government enter-prise where the private sector can perform those activities as well or better than the government. Finally, we can set limits to the transfer activities that take place through the public sector.

These proposals appear radical only because in the last half-century, we have learned to live with the dead weight burden of a ubiquitous role for government in the economy. Our economic liberties have been eroded because the government has expanded; if we are to protect those liberties, we must set limits to the power of government to intervene in our economic affairs. We can do that within the framework of the Constitution because economic liberties are embodied in the property rights provisions of the Constitution dealing with personal liberties. The burden of protecting those liberties is no greater today than it was when the Constitution was written. []


1.   Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (New York: Random House Modern Library, 1937), p. 538.

2.   W. Blackstone, Commentaries 134, 135, 140.

3.   Op. cit., Smith, p. 539.

4.   The James Madison Letters, March 27, 1792 (New York: Townsend McCoun, 1884), p. 478.

5.   Henry George, Progress and Poverty: An Inquiry into the Cause of Industrial Depression (New York: Robert Schalkenbach Foundation, 1979).

6.   Olsen v. Nebraska, 313, U.S. 236 (1941).

7.   Op. cit., Smith, p. 326.


Plenty of good land and liberty to manage their own affairs in their own way, seem to be the two great causes of the prosperity of all new colonies. In the plenty of good land the English colonies of North America, though, no doubt, very abundantly provided, are, however, inferior to those of the Spaniards and Portuguese, and not superior to some of those possessed by the French before the late war. But the political institutions of the English colonies have been more favorable to the improvement and cultivation of this land, than those of any of the other three nations.[1]

As Smith pointed out, America began not only with an abundance of resources, but more importantly, with a set of political institutions that had evolved over centuries in England. As citizens of the British Empire, Americans enjoyed property rights embodied in the British constitution and defined and enforced through common law. The origins of those property rights can be traced back to the Magna Charta in 1215, which states that no freeman “shall be arrested or detained in person, or deprived of his freehold, or outlawed, or banished, or in any way molested . . . unless by the lawful judgment of his peers and by the law of the land.” The precedent for limited government was established in the Statute of Monopolies when the British Parliament limited the power of the crown to create legal monopolies. From the Glorious Revolution of 1688 emerged a set of political institutions based upon a constitution and representative democracy.

British citizens, including the American colonists, enjoyed property rights that were defined and enforced through a system of common law that had also evolved over centuries. American courts referred to common law precedents in Black-stone to define and enforce individual property rights. In Blackstone, property rights are vested in the individual by the immutable laws of nature before they enter a constitutional contract to form a civil society; the law “will not authorize the least violation of it; no, not even for the good of the whole community . . . the right of property is founded in the law of nature, and it is antecedent to all civil regulations.”[2]

Underlying these political institutions of constitutional government and common law was the ideology of classical liberal political economy as developed in the writings of Hobbes, Locke, Rousseau, Burke, and others. The Lockeanconcept of natural rights and social contract was the foundation for British law translated to the American setting.

The American colonists, in fact, enjoyed property rights that were more clearly defined and enforced than for countrymen in England, as revealed by property rights in land. As Adam Smith observed,

But in all the English colonies the tenure of the lands, which are all held by free socage, facilitates alienation, and the grantee of any extensive tract of land, generally finds it for his interest to alienate, as fast as he can, the greater part of it, reserving only a small quitrent.[3]

Free and common socage meant that the owner of the land could will, lease, or sell the land as he chose. He might have to pay certain incidents or taxes on the land, but those payments had to be fixed and certain and no new obligation could be imposed upon him. After the Revolution the right to impose taxes on the land was vested in the state, and traditional feudal obligations and constraints on the landowner were abolished. From a system of free and common socage evolved the fee simple form of land ownership.

Fee simple was the clearest definition of property rights giving the individual the maximum freedom to use the land, sell it, or pass it along to his heirs, unencumbered by obligations or constraints upon his rights of ownership which still persisted in Europe. This property right in land provided individuals with an incentive to utilize the land in productive ways, facilitated the rapid development of our natural resources, and established the institutional framework for the small family farm which predominates in American agriculture down to the present day.

Unprecedented Freedom

The freedom to enjoy those property rights depended upon constitutional constraints on the power of government to intervene in economic affairs. The American colonists enjoyed an unprecedented freedom from government taxation and regulation of their affairs; indeed, this period in American history can be described as an anarchistic utopia. While the British had an elaborate system of taxation and regulation embodied in the British Navigation laws, the American colonists successfully ignored and circumvented those laws. The American Revolution was triggered by British efforts to enforce these taxes and regulations.

After the Revolution, Americans probably would have preferred to return to the anarchistic utopia they had enjoyed in the early colonial period, but the necessity for a constitutional contract establishing at least a limited central government had been revealed during the war and post-war years. The Federalist Papers written to support ratification of the Constitution convey the ideological foundations for this fundamental institution in classical liberal political economy. The concept of property rights was embodied in the 5th Amendment, that a person shall not be deprived of “life, liberty or property without due process of law.” Americans interpreted these property rights in very broad terms as revealed in the writings of Madison:

This term [property] in its particular application means “that dominion which one man claims and exercises over the external things of the world, in exclusion of every other individual.” In its larger and juster meaning, it embraces everything to which a man may attach a value and have a right, and which leaves to everyone else the like advantage. In the former sense, a man’s land, or merchandise, or money, is called his property. In the latter sense, a man has a property in his opinions and the free communication of them. He has a property of peculiar value in his religious opinions, and in the profession and practice dictated by them. He has property very dear to him in the safety and liberty of his person. He has an equal property in the free use of his faculties, and free choice of the objects on which to employ them. In a word, as a man is said to have a right to his property, he may be equally said to have a property in his rights.[4]

Property rights were also protected by specific constitutional constraints on the power of government. In addition to the due process clause, the Constitution specifically prohibits retroactive laws and requires that laws affecting private property, such as laws of taxation, be general and uniform. The contract clause placed limitations on the power of the government to interfere with contracts between the state and the individual as well as contracts between private individuals. The commerce clause restricts federal government regulation to interstate commerce, reserving regulatory powers over intrastate commerce to the individual states. Property rights were also protected by the broader provisions of the Constitution reserving powers to the states, and establishing separation of powers in the different branches of government.

Equal Opportunity Meant Equal Protection Under the Law

In the early 19th century, the Supreme Court established the neutrality of the Court and the supremacy of the Court in adjudicating constitutional issues. In a series of decisions, the Supreme Court defined the various provisions of the Constitution so as to more clearly define and protect the property rights of American citizens. American society was governed by a rule of law which protected the property rights of a citizen from coercion by government as well as by his fellow citizens. A person’s actions were judged to be legally permissible, not by reference to whether they yielded benefits or losses to society, but whether they violated the rights of others in the society. Equal opportunity meant equal protection under the law.

It should not be surprising to find that the 19th century witnessed rapid economic growth and development. Within this institutional framework,’ Americans had the greatest freedom to maximize their individual welfare and in the process maximize the welfare of the society as a whole. This was reflected in rapid growth in population and westward expansion, high and sustained rates of growth in income per capita, and improvements in standards of living.

Rapid economic growth was also accompanied by greater inequalities in the distribution of income and wealth. One could identify a group of wealthy citizens, a larger middle class, and a number of Americans living in what Henry George referred to as vice and misery. In his book, Progress and Poverty, George called for the redistribution of wealth to achieve a more egalitar ian society.[5] Reinforcing these sentiments was a utilitarian ideology developed by Bentham and others. The presuppositions of classical liberalism were replaced by utilitarianism, i.e., improving social welfare by maximizing the greatest good for the greatest number.

For Bentham and other utilitarians, the calculus of pleasure and pain could be refined into a rationale for legislation and adjudication. Of course, this required some definition of social welfare that would take precedence over individual property rights, and political economists were quick to offer such definitions in terms of an egalitarian society, rapid economic growth, and other visions of social progress. The new philosophy of empiricism seemed to establish utilitarianism as a scientific approach to human affairs analogous to the developments taking place in the physical and natural sciences.

Special Interests

Within this ideological environment, changes began to occur in American institutions. Various interest groups began to look upon government, not as a set of institutions to guarantee individual property rights, but rather as an institutional arrangement to be used to benefit their narrow interest group. Farm organizations such as the Grange, labor unions, and business interests successfully lobbied for special interest legislation, and government at both the state and national level responded with an unprecedented array of taxes and regulations that conflicted with in dividual property rights.

The crucial question was whether the courts would legitimize this change in the rules of the game or continue to protect individual property rights under the Constitution. The courts did not suddenly abandon their role as a neutral arbiter on constitutional issues, but they did begin to redefine the Constitution in ways that permitted an expansion in the powers of government, resulting in an erosion of individual property rights. While this change in the rules of the game occurred over a long period of time, one can identify the case of Munn v. the State of Illinois in 1877 as the landmark decision.

In response to the Grange influence, the state of Illinois passed legislation fixing the rates charged by grain elevators. Munn, who was a grain elevator operator, challenged the regulations as a violation of his property rights under the due process clause of the Constitution. In upholding the regulatory power of the state government, the Supreme Court introduced a doctrine that would have a profound effect on property rights in this country. The Court ruled that property cloaked with the public interest may be subject to control for the common good.

In subsequent decisions, the Court continued to protect private property rights under what is defined as substantive due process. The courts legitimized government regulation that infringed upon private property rights, but they maintained that such regulation must be reasonable. Before the state could infringe upon private property rights, it was required to demonstrate that the ends were justified and that the specific government legislation was a reasonable means to that end. For example, railroad rates could be regulated, but the state was required to show that the regulated rates were not unduly confiscatory but were reasonable. This required that the courts interpret the reasonableness of legislation with respect to the ends and the effectiveness of the legislation in achieving those ends.

The “Rule of Reason”

This “rule of reason” left a wide scope for judicial interpretation depending upon the point of view of the justices, which of course changed over time. While the decisions of the justices were often conflicting and arbitrary, the courts negated a wide range of legislation that did not satisfy the rule of reason. Thus, the courts continued to function as an independent judiciary protecting economic liberty under the Constitution during the half-century of substantive due process up to the 1930s.

The Great Depression brought fundamental changes in American institutions. Farmers, workers, and businessmen all turned to the government for aid in the economic crisis. The Roosevelt administration responded with the New Deal calling for government regulation of virtually every aspect of economic activity. The National Recovery Act established government controls over most manufacturing industries, regulating prices and output. The Agricultural Adjustment Act imposed similar controls over the agricultural sector. Banking and financial institutions were subject to a wide range of government regulations. The Tennessee Valley Development Act brought the government into direct competition with private utility companies. The Wagner Act shifted the government to the support of labor unions as collective bargaining agents in labor markets. Governmental transfer activities expanded at an unprecedented rate through employment programs, welfare programs, social security, and unemployment insurance.

This decidedly collectivist shift in our institutional framework was defended on pragmatic grounds. The architects of the New Deal argued that we could no longer rely on laissez-faire institutions based upon private property rights; the problems of the Great Depression required a governmental solution. The philosophy of pragmatism developed by Charles S. Peirce, William James, and John Dewey provided ideological underpinnings to this pragmatic approach to government policy, and the political economy of John Maynard Keynes provided an economic rationale for the expanded role of government in the economy. But the crucial question in the 1930s was how the Court would deal with the new legislation.

The initial response of the Supreme Court was to negate much of the New Deal legislation on the grounds that it violated the Constitution. However, in the late 1930s, the Court reversed itself, sanctioning New Deal legislation which it had earlier declared unconstitutional. Legal scholars still debate the causes for this shift in the Court’s position. Certainly, the political pressures of the Great Depression, and more specifically Roosevelt’s Court packing scheme to change the composition of the Court, must have influenced the justices. Yet the shift in judicial interpretation must also be understood in the context of the erosion in private property rights that had occurred since the late 19th century.

Abdication of the traditional role of the Court in judicial review of economic legislation was justified on the grounds that economic liberties are subject to a lower standard for judicial review than personal liberties. In the words of Justice Douglas:

We are not concerned, however, with the wisdom, need or appropriateness of the legislation. Differences of opinion on that score suggest a choice which should be left where it was by the Constitution . . . to the states and to Congress . . . There is no necessity for the state to demonstrate before us that evils persist despite the competition which attends bargaining in the field. In final analysis the only constitutional prohibition or restraint which respondents have suggested for the invalidation of this legislation are those notions of public policy embedded in earlier decisions of this court, but which, as Mr. Justice Holmes long admonished, should not be read into the Constitution. Since they do not find expression in the Constitution, we cannot give them continuing vitality as standards by which the constitutionality of the economic and social pro grams of the states is to be determined.[6]

The Rational Relation Test

What emerged from this judicial interpretation was the rational relation test requiring minimum scrutiny of economic legislation. Any legislation can pass this minimal standard for judicial review if it does not impinge upon the personal rights defined in the first amendment and has some rational relation to a public purpose. Since every economic regulation has some rational relation to a public purpose, the rational relation test has meant judicial withdrawal from further review of legislation, even when it violates individual property rights, imposing severe economic burdens on the individual. Since the 1930s, the Court has not invalidated a single piece of economic legislation on Constitutional grounds. A virtual explosion in legislation has established a ubiquitous role for government in the economy sanctioned by judicial abdication in reviewing that legislation.

This change in the rules of the game has had a profound impact on the institutional framework of the American economy. The expanded role for government has created even greater incentives for transfer activities as opposed to productive activities. As more resources have been allocated to transfer activities through the public sector, the productivity and wealth of the society has diminished. In spite of this shift from productive activities to transfer activities, the economy has continued to experience growth and development.

In the words of Adam Smith, “the uniform, constant, and uninterrupted effort of every man to better his condition, the principle from which public and national, as well as private opulence is originally derived,” has been “powerful enough to maintain the natural progress of things toward improvement, in spite of both the extravagance of governments and of the greatest errors of administration. Like the unknown principle of animal life, it frequently restores health and vigour to the Constitution, in spite, not only of the disease, but of the absurd prescriptions of the doctor.”[7]

Changing Rules of the Game

Recent]y, economists have questioned whether our society will continue to prosper in an institutional framework which motivates people to engage in transfer activities rather than productive activities. More importantly, they have challenged the change in the rules of the game that gave rise to these transfer activities. It is clear that the writers of the American Constitution incorporated a concept of property rights which included economic liberties as well as personal liberties. Over the first century of our history, the courts functioned as an independent judiciary interpreting the Constitution so as to protect individuals’ economic as well as personal liberties. In the last century and especially since the 1930s, those property rights have been eroded as the courts abdicated their role in subjecting economic liberties to a lower standard of judicial review than personal liberties.

The modern heirs of classical political economy such as James Buchanan and Gordon Tullock, have developed the public choice paradigm built upon the Lockean presupposition of natural rights and social contract. In the public choice paradigm, there is no constitutional basis for a dichotomy between economic liberty and personal liberty; indeed, it is difficult to perceive of a society in which individuals enjoy one set of property rights without the other. The freedom to do material things is just as important as freedom of expression and other personal liberties.

How Americans resolve this controversy over the economic provisions of the Constitution will have a profound impact upon the future of the society. Some political economists, such as Milton Friedman, argue that property rights have been so eroded over time that the only course of action to secure those rights is through constitutional amendment. Yet a constitutional convention organized to incorporate an economic bill of rights into the Constitution could easily lead to changes in the Constitution that would destroy individual property rights rather than secure them.

For those of us unwilling to take that risk, an alternative course of action appears more viable. We can enact rules to limit federal government spending and taxation as we have done at the state and local level. We can demand the withdrawal of government from antitrust, and regulatory activities, that infringe upon private property rights. We can substitute private enterprise for government enter-prise where the private sector can perform those activities as well or better than the government. Finally, we can set limits to the transfer activities that take place through the public sector.

These proposals appear radical only because in the last half-century, we have learned to live with the dead weight burden of a ubiquitous role for government in the economy. Our economic liberties have been eroded because the government has expanded; if we are to protect those liberties, we must set limits to the power of government to intervene in our economic affairs. We can do that within the framework of the Constitution because economic liberties are embodied in the property rights provisions of the Constitution dealing with personal liberties. The burden of protecting those liberties is no greater today than it was when the Constitution was written. []


1.   Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (New York: Random House Modern Library, 1937), p. 538.

2.   W. Blackstone, Commentaries 134, 135, 140.

3.   Op. cit., Smith, p. 539.

4.   The James Madison Letters, March 27, 1792 (New York: Townsend McCoun, 1884), p. 478.

5.   Henry George, Progress and Poverty: An Inquiry into the Cause of Industrial Depression (New York: Robert Schalkenbach Foundation, 1979).

6.   Olsen v. Nebraska, 313, U.S. 236 (1941).

7.   Op. cit., Smith, p. 326.

As we approach the bicentennial of the ratification of the Constitution, Americans face what many regard as a constitutional crisis. A resolution calling for a constitutional convention to limit the spending powers of government has been approved by thirty-one out of a required thirty-four states. Over two hundred other constitutional amendments, many of them dealing with economic issues, have been proposed in Congress in the last three years. We seem to be rapidly approaching a state of constitutional anarchy in which a host of economic problems remain unresolved within the framework of the Constitution. If we are to avoid a constitutional crisis, we must understand the origins of the economic provisions in the Constitution and what has happened to those provisions through Supreme Court interpretation over time.

In 1776 Adam Smith published the Wealth of Nations, the foundation of modern economic science,wherein he explained the basis for American prosperity:


Plenty of good land and liberty to manage their own affairs in their own way, seem to be the two great causes of the prosperity of all new colonies. In the plenty of good land the English colonies of North America, though, no doubt, very abundantly provided, are, however, inferior to those of the Spaniards and Portuguese, and not superior to some of those possessed by the French before the late war. But the political institutions of the English colonies have been more favorable to the improvement and cultivation of this land, than those of any of the other three nations.[1]

As Smith pointed out, America began not only with an abundance of resources, but more importantly, with a set of political institutions that had evolved over centuries in England. As citizens of the British Empire, Americans enjoyed property rights embodied in the British constitution and defined and enforced through common law. The origins of those property rights can be traced back to the Magna Charta in 1215, which states that no freeman “shall be arrested or detained in person, or deprived of his freehold, or outlawed, or banished, or in any way molested . . . unless by the lawful judgment of his peers and by the law of the land.” The precedent for limited government was established in the Statute of Monopolies when the British Parliament limited the power of the crown to create legal monopolies. From the Glorious Revolution of 1688 emerged a set of political institutions based upon a constitution and representative democracy.

British citizens, including the American colonists, enjoyed property rights that were defined and enforced through a system of common law that had also evolved over centuries. American courts referred to common law precedents in Black-stone to define and enforce individual property rights. In Blackstone, property rights are vested in the individual by the immutable laws of nature before they enter a constitutional contract to form a civil society; the law “will not authorize the least violation of it; no, not even for the good of the whole community . . . the right of property is founded in the law of nature, and it is antecedent to all civil regulations.”[2]

Underlying these political institutions of constitutional government and common law was the ideology of classical liberal political economy as developed in the writings of Hobbes, Locke, Rousseau, Burke, and others. The Lockeanconcept of natural rights and social contract was the foundation for British law translated to the American setting.

The American colonists, in fact, enjoyed property rights that were more clearly defined and enforced than for countrymen in England, as revealed by property rights in land. As Adam Smith observed,

But in all the English colonies the tenure of the lands, which are all held by free socage, facilitates alienation, and the grantee of any extensive tract of land, generally finds it for his interest to alienate, as fast as he can, the greater part of it, reserving only a small quitrent.[3]

Free and common socage meant that the owner of the land could will, lease, or sell the land as he chose. He might have to pay certain incidents or taxes on the land, but those payments had to be fixed and certain and no new obligation could be imposed upon him. After the Revolution the right to impose taxes on the land was vested in the state, and traditional feudal obligations and constraints on the landowner were abolished. From a system of free and common socage evolved the fee simple form of land ownership.

Fee simple was the clearest definition of property rights giving the individual the maximum freedom to use the land, sell it, or pass it along to his heirs, unencumbered by obligations or constraints upon his rights of ownership which still persisted in Europe. This property right in land provided individuals with an incentive to utilize the land in productive ways, facilitated the rapid development of our natural resources, and established the institutional framework for the small family farm which predominates in American agriculture down to the present day.

Unprecedented Freedom

The freedom to enjoy those property rights depended upon constitutional constraints on the power of government to intervene in economic affairs. The American colonists enjoyed an unprecedented freedom from government taxation and regulation of their affairs; indeed, this period in American history can be described as an anarchistic utopia. While the British had an elaborate system of taxation and regulation embodied in the British Navigation laws, the American colonists successfully ignored and circumvented those laws. The American Revolution was triggered by British efforts to enforce these taxes and regulations.

After the Revolution, Americans probably would have preferred to return to the anarchistic utopia they had enjoyed in the early colonial period, but the necessity for a constitutional contract establishing at least a limited central government had been revealed during the war and post-war years. The Federalist Papers written to support ratification of the Constitution convey the ideological foundations for this fundamental institution in classical liberal political economy. The concept of property rights was embodied in the 5th Amendment, that a person shall not be deprived of “life, liberty or property without due process of law.” Americans interpreted these property rights in very broad terms as revealed in the writings of Madison:

This term [property] in its particular application means “that dominion which one man claims and exercises over the external things of the world, in exclusion of every other individual.” In its larger and juster meaning, it embraces everything to which a man may attach a value and have a right, and which leaves to everyone else the like advantage. In the former sense, a man’s land, or merchandise, or money, is called his property. In the latter sense, a man has a property in his opinions and the free communication of them. He has a property of peculiar value in his religious opinions, and in the profession and practice dictated by them. He has property very dear to him in the safety and liberty of his person. He has an equal property in the free use of his faculties, and free choice of the objects on which to employ them. In a word, as a man is said to have a right to his property, he may be equally said to have a property in his rights.[4]

Property rights were also protected by specific constitutional constraints on the power of government. In addition to the due process clause, the Constitution specifically prohibits retroactive laws and requires that laws affecting private property, such as laws of taxation, be general and uniform. The contract clause placed limitations on the power of the government to interfere with contracts between the state and the individual as well as contracts between private individuals. The commerce clause restricts federal government regulation to interstate commerce, reserving regulatory powers over intrastate commerce to the individual states. Property rights were also protected by the broader provisions of the Constitution reserving powers to the states, and establishing separation of powers in the different branches of government.

Equal Opportunity Meant Equal Protection Under the Law

In the early 19th century, the Supreme Court established the neutrality of the Court and the supremacy of the Court in adjudicating constitutional issues. In a series of decisions, the Supreme Court defined the various provisions of the Constitution so as to more clearly define and protect the property rights of American citizens. American society was governed by a rule of law which protected the property rights of a citizen from coercion by government as well as by his fellow citizens. A person’s actions were judged to be legally permissible, not by reference to whether they yielded benefits or losses to society, but whether they violated the rights of others in the society. Equal opportunity meant equal protection under the law.

It should not be surprising to find that the 19th century witnessed rapid economic growth and development. Within this institutional framework,’ Americans had the greatest freedom to maximize their individual welfare and in the process maximize the welfare of the society as a whole. This was reflected in rapid growth in population and westward expansion, high and sustained rates of growth in income per capita, and improvements in standards of living.

Rapid economic growth was also accompanied by greater inequalities in the distribution of income and wealth. One could identify a group of wealthy citizens, a larger middle class, and a number of Americans living in what Henry George referred to as vice and misery. In his book, Progress and Poverty, George called for the redistribution of wealth to achieve a more egalitar ian society.[5] Reinforcing these sentiments was a utilitarian ideology developed by Bentham and others. The presuppositions of classical liberalism were replaced by utilitarianism, i.e., improving social welfare by maximizing the greatest good for the greatest number.

For Bentham and other utilitarians, the calculus of pleasure and pain could be refined into a rationale for legislation and adjudication. Of course, this required some definition of social welfare that would take precedence over individual property rights, and political economists were quick to offer such definitions in terms of an egalitarian society, rapid economic growth, and other visions of social progress. The new philosophy of empiricism seemed to establish utilitarianism as a scientific approach to human affairs analogous to the developments taking place in the physical and natural sciences.

Special Interests

Within this ideological environment, changes began to occur in American institutions. Various interest groups began to look upon government, not as a set of institutions to guarantee individual property rights, but rather as an institutional arrangement to be used to benefit their narrow interest group. Farm organizations such as the Grange, labor unions, and business interests successfully lobbied for special interest legislation, and government at both the state and national level responded with an unprecedented array of taxes and regulations that conflicted with in dividual property rights.

The crucial question was whether the courts would legitimize this change in the rules of the game or continue to protect individual property rights under the Constitution. The courts did not suddenly abandon their role as a neutral arbiter on constitutional issues, but they did begin to redefine the Constitution in ways that permitted an expansion in the powers of government, resulting in an erosion of individual property rights. While this change in the rules of the game occurred over a long period of time, one can identify the case of Munn v. the State of Illinois in 1877 as the landmark decision.

In response to the Grange influence, the state of Illinois passed legislation fixing the rates charged by grain elevators. Munn, who was a grain elevator operator, challenged the regulations as a violation of his property rights under the due process clause of the Constitution. In upholding the regulatory power of the state government, the Supreme Court introduced a doctrine that would have a profound effect on property rights in this country. The Court ruled that property cloaked with the public interest may be subject to control for the common good.

In subsequent decisions, the Court continued to protect private property rights under what is defined as substantive due process. The courts legitimized government regulation that infringed upon private property rights, but they maintained that such regulation must be reasonable. Before the state could infringe upon private property rights, it was required to demonstrate that the ends were justified and that the specific government legislation was a reasonable means to that end. For example, railroad rates could be regulated, but the state was required to show that the regulated rates were not unduly confiscatory but were reasonable. This required that the courts interpret the reasonableness of legislation with respect to the ends and the effectiveness of the legislation in achieving those ends.

The “Rule of Reason”

This “rule of reason” left a wide scope for judicial interpretation depending upon the point of view of the justices, which of course changed over time. While the decisions of the justices were often conflicting and arbitrary, the courts negated a wide range of legislation that did not satisfy the rule of reason. Thus, the courts continued to function as an independent judiciary protecting economic liberty under the Constitution during the half-century of substantive due process up to the 1930s.

The Great Depression brought fundamental changes in American institutions. Farmers, workers, and businessmen all turned to the government for aid in the economic crisis. The Roosevelt administration responded with the New Deal calling for government regulation of virtually every aspect of economic activity. The National Recovery Act established government controls over most manufacturing industries, regulating prices and output. The Agricultural Adjustment Act imposed similar controls over the agricultural sector. Banking and financial institutions were subject to a wide range of government regulations. The Tennessee Valley Development Act brought the government into direct competition with private utility companies. The Wagner Act shifted the government to the support of labor unions as collective bargaining agents in labor markets. Governmental transfer activities expanded at an unprecedented rate through employment programs, welfare programs, social security, and unemployment insurance.

This decidedly collectivist shift in our institutional framework was defended on pragmatic grounds. The architects of the New Deal argued that we could no longer rely on laissez-faire institutions based upon private property rights; the problems of the Great Depression required a governmental solution. The philosophy of pragmatism developed by Charles S. Peirce, William James, and John Dewey provided ideological underpinnings to this pragmatic approach to government policy, and the political economy of John Maynard Keynes provided an economic rationale for the expanded role of government in the economy. But the crucial question in the 1930s was how the Court would deal with the new legislation.

The initial response of the Supreme Court was to negate much of the New Deal legislation on the grounds that it violated the Constitution. However, in the late 1930s, the Court reversed itself, sanctioning New Deal legislation which it had earlier declared unconstitutional. Legal scholars still debate the causes for this shift in the Court’s position. Certainly, the political pressures of the Great Depression, and more specifically Roosevelt’s Court packing scheme to change the composition of the Court, must have influenced the justices. Yet the shift in judicial interpretation must also be understood in the context of the erosion in private property rights that had occurred since the late 19th century.

Abdication of the traditional role of the Court in judicial review of economic legislation was justified on the grounds that economic liberties are subject to a lower standard for judicial review than personal liberties. In the words of Justice Douglas:

We are not concerned, however, with the wisdom, need or appropriateness of the legislation. Differences of opinion on that score suggest a choice which should be left where it was by the Constitution . . . to the states and to Congress . . . There is no necessity for the state to demonstrate before us that evils persist despite the competition which attends bargaining in the field. In final analysis the only constitutional prohibition or restraint which respondents have suggested for the invalidation of this legislation are those notions of public policy embedded in earlier decisions of this court, but which, as Mr. Justice Holmes long admonished, should not be read into the Constitution. Since they do not find expression in the Constitution, we cannot give them continuing vitality as standards by which the constitutionality of the economic and social pro grams of the states is to be determined.[6]

The Rational Relation Test

What emerged from this judicial interpretation was the rational relation test requiring minimum scrutiny of economic legislation. Any legislation can pass this minimal standard for judicial review if it does not impinge upon the personal rights defined in the first amendment and has some rational relation to a public purpose. Since every economic regulation has some rational relation to a public purpose, the rational relation test has meant judicial withdrawal from further review of legislation, even when it violates individual property rights, imposing severe economic burdens on the individual. Since the 1930s, the Court has not invalidated a single piece of economic legislation on Constitutional grounds. A virtual explosion in legislation has established a ubiquitous role for government in the economy sanctioned by judicial abdication in reviewing that legislation.

This change in the rules of the game has had a profound impact on the institutional framework of the American economy. The expanded role for government has created even greater incentives for transfer activities as opposed to productive activities. As more resources have been allocated to transfer activities through the public sector, the productivity and wealth of the society has diminished. In spite of this shift from productive activities to transfer activities, the economy has continued to experience growth and development.

In the words of Adam Smith, “the uniform, constant, and uninterrupted effort of every man to better his condition, the principle from which public and national, as well as private opulence is originally derived,” has been “powerful enough to maintain the natural progress of things toward improvement, in spite of both the extravagance of governments and of the greatest errors of administration. Like the unknown principle of animal life, it frequently restores health and vigour to the Constitution, in spite, not only of the disease, but of the absurd prescriptions of the doctor.”[7]

Changing Rules of the Game

Recent]y, economists have questioned whether our society will continue to prosper in an institutional framework which motivates people to engage in transfer activities rather than productive activities. More importantly, they have challenged the change in the rules of the game that gave rise to these transfer activities. It is clear that the writers of the American Constitution incorporated a concept of property rights which included economic liberties as well as personal liberties. Over the first century of our history, the courts functioned as an independent judiciary interpreting the Constitution so as to protect individuals’ economic as well as personal liberties. In the last century and especially since the 1930s, those property rights have been eroded as the courts abdicated their role in subjecting economic liberties to a lower standard of judicial review than personal liberties.

The modern heirs of classical political economy such as James Buchanan and Gordon Tullock, have developed the public choice paradigm built upon the Lockean presupposition of natural rights and social contract. In the public choice paradigm, there is no constitutional basis for a dichotomy between economic liberty and personal liberty; indeed, it is difficult to perceive of a society in which individuals enjoy one set of property rights without the other. The freedom to do material things is just as important as freedom of expression and other personal liberties.

How Americans resolve this controversy over the economic provisions of the Constitution will have a profound impact upon the future of the society. Some political economists, such as Milton Friedman, argue that property rights have been so eroded over time that the only course of action to secure those rights is through constitutional amendment. Yet a constitutional convention organized to incorporate an economic bill of rights into the Constitution could easily lead to changes in the Constitution that would destroy individual property rights rather than secure them.

For those of us unwilling to take that risk, an alternative course of action appears more viable. We can enact rules to limit federal government spending and taxation as we have done at the state and local level. We can demand the withdrawal of government from antitrust, and regulatory activities, that infringe upon private property rights. We can substitute private enterprise for government enter-prise where the private sector can perform those activities as well or better than the government. Finally, we can set limits to the transfer activities that take place through the public sector.

These proposals appear radical only because in the last half-century, we have learned to live with the dead weight burden of a ubiquitous role for government in the economy. Our economic liberties have been eroded because the government has expanded; if we are to protect those liberties, we must set limits to the power of government to intervene in our economic affairs. We can do that within the framework of the Constitution because economic liberties are embodied in the property rights provisions of the Constitution dealing with personal liberties. The burden of protecting those liberties is no greater today than it was when the Constitution was written. []


1.   Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (New York: Random House Modern Library, 1937), p. 538.

2.   W. Blackstone, Commentaries 134, 135, 140.

3.   Op. cit., Smith, p. 539.

4.   The James Madison Letters, March 27, 1792 (New York: Townsend McCoun, 1884), p. 478.

5.   Henry George, Progress and Poverty: An Inquiry into the Cause of Industrial Depression (New York: Robert Schalkenbach Foundation, 1979).

6.   Olsen v. Nebraska, 313, U.S. 236 (1941).

7.   Op. cit., Smith, p. 326.

As we approach the bicentennial of the ratification of the Constitution, Americans face what many regard as a constitutional crisis. A resolution calling for a constitutional convention to limit the spending powers of government has been approved by thirty-one out of a required thirty-four states. Over two hundred other constitutional amendments, many of them dealing with economic issues, have been proposed in Congress in the last three years. We seem to be rapidly approaching a state of constitutional anarchy in which a host of economic problems remain unresolved within the framework of the Constitution. If we are to avoid a constitutional crisis, we must understand the origins of the economic provisions in the Constitution and what has happened to those provisions through Supreme Court interpretation over time.

In 1776 Adam Smith published the Wealth of Nations, the foundation of modern economic science,wherein he explained the basis for American prosperity:


Plenty of good land and liberty to manage their own affairs in their own way, seem to be the two great causes of the prosperity of all new colonies. In the plenty of good land the English colonies of North America, though, no doubt, very abundantly provided, are, however, inferior to those of the Spaniards and Portuguese, and not superior to some of those possessed by the French before the late war. But the political institutions of the English colonies have been more favorable to the improvement and cultivation of this land, than those of any of the other three nations.[1]

As Smith pointed out, America began not only with an abundance of resources, but more importantly, with a set of political institutions that had evolved over centuries in England. As citizens of the British Empire, Americans enjoyed property rights embodied in the British constitution and defined and enforced through common law. The origins of those property rights can be traced back to the Magna Charta in 1215, which states that no freeman “shall be arrested or detained in person, or deprived of his freehold, or outlawed, or banished, or in any way molested . . . unless by the lawful judgment of his peers and by the law of the land.” The precedent for limited government was established in the Statute of Monopolies when the British Parliament limited the power of the crown to create legal monopolies. From the Glorious Revolution of 1688 emerged a set of political institutions based upon a constitution and representative democracy.

British citizens, including the American colonists, enjoyed property rights that were defined and enforced through a system of common law that had also evolved over centuries. American courts referred to common law precedents in Black-stone to define and enforce individual property rights. In Blackstone, property rights are vested in the individual by the immutable laws of nature before they enter a constitutional contract to form a civil society; the law “will not authorize the least violation of it; no, not even for the good of the whole community . . . the right of property is founded in the law of nature, and it is antecedent to all civil regulations.”[2]

Underlying these political institutions of constitutional government and common law was the ideology of classical liberal political economy as developed in the writings of Hobbes, Locke, Rousseau, Burke, and others. The Lockeanconcept of natural rights and social contract was the foundation for British law translated to the American setting.

The American colonists, in fact, enjoyed property rights that were more clearly defined and enforced than for countrymen in England, as revealed by property rights in land. As Adam Smith observed,

But in all the English colonies the tenure of the lands, which are all held by free socage, facilitates alienation, and the grantee of any extensive tract of land, generally finds it for his interest to alienate, as fast as he can, the greater part of it, reserving only a small quitrent.[3]

Free and common socage meant that the owner of the land could will, lease, or sell the land as he chose. He might have to pay certain incidents or taxes on the land, but those payments had to be fixed and certain and no new obligation could be imposed upon him. After the Revolution the right to impose taxes on the land was vested in the state, and traditional feudal obligations and constraints on the landowner were abolished. From a system of free and common socage evolved the fee simple form of land ownership.

Fee simple was the clearest definition of property rights giving the individual the maximum freedom to use the land, sell it, or pass it along to his heirs, unencumbered by obligations or constraints upon his rights of ownership which still persisted in Europe. This property right in land provided individuals with an incentive to utilize the land in productive ways, facilitated the rapid development of our natural resources, and established the institutional framework for the small family farm which predominates in American agriculture down to the present day.

Unprecedented Freedom

The freedom to enjoy those property rights depended upon constitutional constraints on the power of government to intervene in economic affairs. The American colonists enjoyed an unprecedented freedom from government taxation and regulation of their affairs; indeed, this period in American history can be described as an anarchistic utopia. While the British had an elaborate system of taxation and regulation embodied in the British Navigation laws, the American colonists successfully ignored and circumvented those laws. The American Revolution was triggered by British efforts to enforce these taxes and regulations.

After the Revolution, Americans probably would have preferred to return to the anarchistic utopia they had enjoyed in the early colonial period, but the necessity for a constitutional contract establishing at least a limited central government had been revealed during the war and post-war years. The Federalist Papers written to support ratification of the Constitution convey the ideological foundations for this fundamental institution in classical liberal political economy. The concept of property rights was embodied in the 5th Amendment, that a person shall not be deprived of “life, liberty or property without due process of law.” Americans interpreted these property rights in very broad terms as revealed in the writings of Madison:

This term [property] in its particular application means “that dominion which one man claims and exercises over the external things of the world, in exclusion of every other individual.” In its larger and juster meaning, it embraces everything to which a man may attach a value and have a right, and which leaves to everyone else the like advantage. In the former sense, a man’s land, or merchandise, or money, is called his property. In the latter sense, a man has a property in his opinions and the free communication of them. He has a property of peculiar value in his religious opinions, and in the profession and practice dictated by them. He has property very dear to him in the safety and liberty of his person. He has an equal property in the free use of his faculties, and free choice of the objects on which to employ them. In a word, as a man is said to have a right to his property, he may be equally said to have a property in his rights.[4]

Property rights were also protected by specific constitutional constraints on the power of government. In addition to the due process clause, the Constitution specifically prohibits retroactive laws and requires that laws affecting private property, such as laws of taxation, be general and uniform. The contract clause placed limitations on the power of the government to interfere with contracts between the state and the individual as well as contracts between private individuals. The commerce clause restricts federal government regulation to interstate commerce, reserving regulatory powers over intrastate commerce to the individual states. Property rights were also protected by the broader provisions of the Constitution reserving powers to the states, and establishing separation of powers in the different branches of government.

Equal Opportunity Meant Equal Protection Under the Law

In the early 19th century, the Supreme Court established the neutrality of the Court and the supremacy of the Court in adjudicating constitutional issues. In a series of decisions, the Supreme Court defined the various provisions of the Constitution so as to more clearly define and protect the property rights of American citizens. American society was governed by a rule of law which protected the property rights of a citizen from coercion by government as well as by his fellow citizens. A person’s actions were judged to be legally permissible, not by reference to whether they yielded benefits or losses to society, but whether they violated the rights of others in the society. Equal opportunity meant equal protection under the law.

It should not be surprising to find that the 19th century witnessed rapid economic growth and development. Within this institutional framework,’ Americans had the greatest freedom to maximize their individual welfare and in the process maximize the welfare of the society as a whole. This was reflected in rapid growth in population and westward expansion, high and sustained rates of growth in income per capita, and improvements in standards of living.

Rapid economic growth was also accompanied by greater inequalities in the distribution of income and wealth. One could identify a group of wealthy citizens, a larger middle class, and a number of Americans living in what Henry George referred to as vice and misery. In his book, Progress and Poverty, George called for the redistribution of wealth to achieve a more egalitar ian society.[5] Reinforcing these sentiments was a utilitarian ideology developed by Bentham and others. The presuppositions of classical liberalism were replaced by utilitarianism, i.e., improving social welfare by maximizing the greatest good for the greatest number.

For Bentham and other utilitarians, the calculus of pleasure and pain could be refined into a rationale for legislation and adjudication. Of course, this required some definition of social welfare that would take precedence over individual property rights, and political economists were quick to offer such definitions in terms of an egalitarian society, rapid economic growth, and other visions of social progress. The new philosophy of empiricism seemed to establish utilitarianism as a scientific approach to human affairs analogous to the developments taking place in the physical and natural sciences.

Special Interests

Within this ideological environment, changes began to occur in American institutions. Various interest groups began to look upon government, not as a set of institutions to guarantee individual property rights, but rather as an institutional arrangement to be used to benefit their narrow interest group. Farm organizations such as the Grange, labor unions, and business interests successfully lobbied for special interest legislation, and government at both the state and national level responded with an unprecedented array of taxes and regulations that conflicted with in dividual property rights.

The crucial question was whether the courts would legitimize this change in the rules of the game or continue to protect individual property rights under the Constitution. The courts did not suddenly abandon their role as a neutral arbiter on constitutional issues, but they did begin to redefine the Constitution in ways that permitted an expansion in the powers of government, resulting in an erosion of individual property rights. While this change in the rules of the game occurred over a long period of time, one can identify the case of Munn v. the State of Illinois in 1877 as the landmark decision.

In response to the Grange influence, the state of Illinois passed legislation fixing the rates charged by grain elevators. Munn, who was a grain elevator operator, challenged the regulations as a violation of his property rights under the due process clause of the Constitution. In upholding the regulatory power of the state government, the Supreme Court introduced a doctrine that would have a profound effect on property rights in this country. The Court ruled that property cloaked with the public interest may be subject to control for the common good.

In subsequent decisions, the Court continued to protect private property rights under what is defined as substantive due process. The courts legitimized government regulation that infringed upon private property rights, but they maintained that such regulation must be reasonable. Before the state could infringe upon private property rights, it was required to demonstrate that the ends were justified and that the specific government legislation was a reasonable means to that end. For example, railroad rates could be regulated, but the state was required to show that the regulated rates were not unduly confiscatory but were reasonable. This required that the courts interpret the reasonableness of legislation with respect to the ends and the effectiveness of the legislation in achieving those ends.

The “Rule of Reason”

This “rule of reason” left a wide scope for judicial interpretation depending upon the point of view of the justices, which of course changed over time. While the decisions of the justices were often conflicting and arbitrary, the courts negated a wide range of legislation that did not satisfy the rule of reason. Thus, the courts continued to function as an independent judiciary protecting economic liberty under the Constitution during the half-century of substantive due process up to the 1930s.

The Great Depression brought fundamental changes in American institutions. Farmers, workers, and businessmen all turned to the government for aid in the economic crisis. The Roosevelt administration responded with the New Deal calling for government regulation of virtually every aspect of economic activity. The National Recovery Act established government controls over most manufacturing industries, regulating prices and output. The Agricultural Adjustment Act imposed similar controls over the agricultural sector. Banking and financial institutions were subject to a wide range of government regulations. The Tennessee Valley Development Act brought the government into direct competition with private utility companies. The Wagner Act shifted the government to the support of labor unions as collective bargaining agents in labor markets. Governmental transfer activities expanded at an unprecedented rate through employment programs, welfare programs, social security, and unemployment insurance.

This decidedly collectivist shift in our institutional framework was defended on pragmatic grounds. The architects of the New Deal argued that we could no longer rely on laissez-faire institutions based upon private property rights; the problems of the Great Depression required a governmental solution. The philosophy of pragmatism developed by Charles S. Peirce, William James, and John Dewey provided ideological underpinnings to this pragmatic approach to government policy, and the political economy of John Maynard Keynes provided an economic rationale for the expanded role of government in the economy. But the crucial question in the 1930s was how the Court would deal with the new legislation.

The initial response of the Supreme Court was to negate much of the New Deal legislation on the grounds that it violated the Constitution. However, in the late 1930s, the Court reversed itself, sanctioning New Deal legislation which it had earlier declared unconstitutional. Legal scholars still debate the causes for this shift in the Court’s position. Certainly, the political pressures of the Great Depression, and more specifically Roosevelt’s Court packing scheme to change the composition of the Court, must have influenced the justices. Yet the shift in judicial interpretation must also be understood in the context of the erosion in private property rights that had occurred since the late 19th century.

Abdication of the traditional role of the Court in judicial review of economic legislation was justified on the grounds that economic liberties are subject to a lower standard for judicial review than personal liberties. In the words of Justice Douglas:

We are not concerned, however, with the wisdom, need or appropriateness of the legislation. Differences of opinion on that score suggest a choice which should be left where it was by the Constitution . . . to the states and to Congress . . . There is no necessity for the state to demonstrate before us that evils persist despite the competition which attends bargaining in the field. In final analysis the only constitutional prohibition or restraint which respondents have suggested for the invalidation of this legislation are those notions of public policy embedded in earlier decisions of this court, but which, as Mr. Justice Holmes long admonished, should not be read into the Constitution. Since they do not find expression in the Constitution, we cannot give them continuing vitality as standards by which the constitutionality of the economic and social pro grams of the states is to be determined.[6]

The Rational Relation Test

What emerged from this judicial interpretation was the rational relation test requiring minimum scrutiny of economic legislation. Any legislation can pass this minimal standard for judicial review if it does not impinge upon the personal rights defined in the first amendment and has some rational relation to a public purpose. Since every economic regulation has some rational relation to a public purpose, the rational relation test has meant judicial withdrawal from further review of legislation, even when it violates individual property rights, imposing severe economic burdens on the individual. Since the 1930s, the Court has not invalidated a single piece of economic legislation on Constitutional grounds. A virtual explosion in legislation has established a ubiquitous role for government in the economy sanctioned by judicial abdication in reviewing that legislation.

This change in the rules of the game has had a profound impact on the institutional framework of the American economy. The expanded role for government has created even greater incentives for transfer activities as opposed to productive activities. As more resources have been allocated to transfer activities through the public sector, the productivity and wealth of the society has diminished. In spite of this shift from productive activities to transfer activities, the economy has continued to experience growth and development.

In the words of Adam Smith, “the uniform, constant, and uninterrupted effort of every man to better his condition, the principle from which public and national, as well as private opulence is originally derived,” has been “powerful enough to maintain the natural progress of things toward improvement, in spite of both the extravagance of governments and of the greatest errors of administration. Like the unknown principle of animal life, it frequently restores health and vigour to the Constitution, in spite, not only of the disease, but of the absurd prescriptions of the doctor.”[7]

Changing Rules of the Game

Recent]y, economists have questioned whether our society will continue to prosper in an institutional framework which motivates people to engage in transfer activities rather than productive activities. More importantly, they have challenged the change in the rules of the game that gave rise to these transfer activities. It is clear that the writers of the American Constitution incorporated a concept of property rights which included economic liberties as well as personal liberties. Over the first century of our history, the courts functioned as an independent judiciary interpreting the Constitution so as to protect individuals’ economic as well as personal liberties. In the last century and especially since the 1930s, those property rights have been eroded as the courts abdicated their role in subjecting economic liberties to a lower standard of judicial review than personal liberties.

The modern heirs of classical political economy such as James Buchanan and Gordon Tullock, have developed the public choice paradigm built upon the Lockean presupposition of natural rights and social contract. In the public choice paradigm, there is no constitutional basis for a dichotomy between economic liberty and personal liberty; indeed, it is difficult to perceive of a society in which individuals enjoy one set of property rights without the other. The freedom to do material things is just as important as freedom of expression and other personal liberties.

How Americans resolve this controversy over the economic provisions of the Constitution will have a profound impact upon the future of the society. Some political economists, such as Milton Friedman, argue that property rights have been so eroded over time that the only course of action to secure those rights is through constitutional amendment. Yet a constitutional convention organized to incorporate an economic bill of rights into the Constitution could easily lead to changes in the Constitution that would destroy individual property rights rather than secure them.

For those of us unwilling to take that risk, an alternative course of action appears more viable. We can enact rules to limit federal government spending and taxation as we have done at the state and local level. We can demand the withdrawal of government from antitrust, and regulatory activities, that infringe upon private property rights. We can substitute private enterprise for government enter-prise where the private sector can perform those activities as well or better than the government. Finally, we can set limits to the transfer activities that take place through the public sector.

These proposals appear radical only because in the last half-century, we have learned to live with the dead weight burden of a ubiquitous role for government in the economy. Our economic liberties have been eroded because the government has expanded; if we are to protect those liberties, we must set limits to the power of government to intervene in our economic affairs. We can do that within the framework of the Constitution because economic liberties are embodied in the property rights provisions of the Constitution dealing with personal liberties. The burden of protecting those liberties is no greater today than it was when the Constitution was written. []


1.   Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (New York: Random House Modern Library, 1937), p. 538.

2.   W. Blackstone, Commentaries 134, 135, 140.

3.   Op. cit., Smith, p. 539.

4.   The James Madison Letters, March 27, 1792 (New York: Townsend McCoun, 1884), p. 478.

5.   Henry George, Progress and Poverty: An Inquiry into the Cause of Industrial Depression (New York: Robert Schalkenbach Foundation, 1979).

6.   Olsen v. Nebraska, 313, U.S. 236 (1941).

7.   Op. cit., Smith, p. 326.