Dr. Livingston is vice president and director of Freeman Services at The Foundation for Economic Education.
Entrepreneurs have the unparalleled ability to satisfy our material wants and needs. To seek and win customer approval on a daily basis, market competitors must continually offer improved quality and lower prices.
Our well-being is also profoundly affected by another entrepreneurial function that is less understood. It is a task that echoes the feats of self-assertion of barons, landed gentry, and others in centuries past who defended their private rights against encroachments by kings, emperors, monarchs, and parliaments. Such actions were frequently associated with the expansion of freedom. Similarly, it is the entrepreneur’s dogged pursuit of private interests in a competitive environment that can create new industries and engender a greater liberty.
Many developments in the political life of the eighteenth century reflected John Locke’s proscriptions for limiting power. Guided by the wisdom of Locke and other philosophers, including David Hume, James Harrington, Montesquieu, and Adam Smith, America’s Founders created peaceful, constitutional methods for defending life, liberty, and property. When Chief Justice John Marshall successfully instituted a procedure in 1803 by which legislative measures believed unconstitutional can be overthrown, entrepreneurs gained the right to challenge confiscatory statutes in court.
Entrepreneurs have defended their property using several constitutional provisions including the “contract clause” of Article 1, Section 10, and the “due process” and “takings” clauses of the Fifth and Fourteenth Amendments. During the first three decades of the nineteenth century, entrepreneurs made substantial use of the “contract clause,” which forbids states from enacting any law “impairing the obligation of contracts.” Constitutional rulings under the “contract clause” prevented states from breaching their contracts with individuals, from repealing corporate charters, and from nullifying certain tax exemptions extended to prior owners of property. The importance of the “contract clause” in the defense of property diminished when states discovered they could get around it by adding their own clauses to legislation reserving powers to repeal or modify statutes.
The next constitutional provision to gain ascendancy in the defense of property was the “due process clause” of the Fifth Amendment. Inherited from the Magna Carta and ratified in 1791 as part of the Bill of Rights, it declares that “no person shall . . . be deprived of life, liberty, or property, without due process of law.” Initially applicable to federal legislation, its scope was broadened to encompass state legislation with adoption of the Fourteenth Amendment in 1868. By the end of the nineteenth century, entrepreneurs were using this clause to curb regulation that restrained economic activity. The Court would evaluate a challenged law by comparing its effects to a legislature’s intent. The Court would overturn a statute if it was considered excessively harsh or unrelated to the legislature’s stated purpose. This interpretation of “due process” resulted in nullification of many state regulations from the late 1800s to the middle 1930s with the written opinions of Justices staunchly supporting economic liberty and individual freedom.
During much of President Franklin Roosevelt’s first term, the Court used the “due process clause” as justification for striking down New Deal legislation. But the court began to slip away from its mooring. When it abandoned the “due process” protection of property in 1936, a regulatory leviathan began to grow. For the next half-century, entrepreneurs were consistently defeated in Court decisions that applied a double standard of constitutional review. While the Court accorded substantial protection to nonmaterial civil or human rights, it simultaneously ignored the material rights of private property.
When “due process” protection of economic rights was lost, America became vulnerable to the confiscatory acts of public officials. Corporations must now spend more than four times as much for compliance costs as they pay in taxes. The unabated growth of regulation will continue to weaken property rights until there is nothing left but a title to ownership and an obligation to pay taxes.
To destroy the Trojan horse of tyranny, a battle for economic rights must be waged on many fronts. Entrepreneurs must fight these officials and other regulators in the courts, through public discourse, and at the ballot box. Strategies to strengthen property rights include requiring government to compensate property owners for regulatory “takings,” reform of legal liability laws, and forcing public authorities to compare a proposed regulation’s costs and benefits.
Defending Property Rights
Recent Court interpretations of the “takings clause” of the Fifth and Fourteenth Amendments have offered hope to entrepreneurs in their defense of property. This clause, declaring “nor shall private property be taken for public use, without just compensation,” was applied for the first time to a regulatory “taking” in 1992. In Lucas v. South Carolina Coastal Council, the state was forced to pay a contractor for a “taking” after regulation had effectively reduced his property value to zero. In a more recent case, the High Court ruled in favor of an entrepreneur who had resisted the confiscatory actions of a town that would only give her a license to expand her business if she forfeited ten percent of her property for public use. In a ruling that strengthened property rights and untied the hands of entrepreneurs, Chief Justice Rehnquist wrote: “We can see no reason why the Takings Clause of the Fifth Amendment, as much a part of the Bill of Rights as the First Amendment or the Fourth Amendment, should be relegated to the status of a poor relation.” Because of these rulings, the “takings clause” is now the entrepreneur’s most important constitutional means of defending property.
A principled defense of property rights requires the intellectual virtue of knowledge about liberty’s “first principles.” It also demands the moral virtue of courage. If the genius of markets is that entrepreneurs are not required to possess much information beyond factors directly affecting their products or services, then absence of knowledge about economics as a science of human action poses no immediate threat to profitability. Such ignorance, however, makes sustained action advancing liberty impossible because of unavoidable missteps in the wilderness of political permutations. For example, when entrepreneurs seek preferences they expect that advantages gained as producers will outweigh their consumers’ losses. They are oblivious to the long-run consequences of their acts; consumer losses will equal or exceed producer gains and the standard of living and productivity will fall precipitously.
Ignorance also leads entrepreneurs to sometimes assert that their privileges are compatible with the public good. Nothing could be further from the truth. Privilege-seeking flies in the face of ethical behavior, blurs the distinction between justice and injustice, and fosters widespread legal theft. Plundered groups gaining political ascendancy seek reprisal resulting in an abrogation of the “rule of law” and universal plunder.
The majority of people in a democracy cannot or will not think through the problems of private property and liberty. It is particularly important that business leaders who possess the means of challenging political authority understand the “first principles” of freedom and use this knowledge to light the path toward a principled defense of their property.
A second virtue required by the defenders of property is that of courage. In ancient civilizations, courage was honored when nobles and aristocrats followed rules that tended to preserve the society in which they lived. For example, military valor was the primary means by which the medieval nobility could earn honor. This was a natural consequence of an aristocracy that owed its very existence to war. In Rome, courage was so highly valued that the word virtue, in Latin, came to mean courage. This reflected the requirements of a nation bent on conquering the world.
Resisting privilege and fighting the encroachments of government in a constitutional democracy requires courage and sacrifice and deserves to be honored. Those who challenge political authority run the risk of being labeled antisocial in an age when legislative acts are believed to be reflections of the people’s will. Similarly, resisting preferential legislation that others unabashedly pursue may result in lower revenues. And the costs of defending property in the courts and in the legislative arena may be high. It is honorable for entrepreneurs to defend their economic rights against an acquisitive political authority because these acts satisfy requirements of the free society. It is dishonorable to seek preferences and privilege because doing so undermines social cooperation and facilitates the movement toward unlimited democracy. Freedom does not require entrepreneurs to be altruistic. It does demand that in the pursuit of profit they prevent a separation of the honorable and the useful. So it has always been: Cicero considered this to be the main problem of ethics.
Threats to liberty are ever present as utopian dreamers advocate state coercion to carry out their notions of the good, misguided citizens clamor for government to solve the so-called “problems” of the hour, and individuals seek preferential legislation at the expense of others. We must learn to recognize the fallacies of statist policies and understand the courageous role of the entrepreneur in promoting and extending liberty. As Mises reminded us: “The struggle for freedom . . . is not the struggle of the many against the few but of minorities—sometimes of a minority of but one man—against the majority.”
2. The Framers continually quoted or paraphrased these philosophers in their correspondence and at the Constitutional Convention. Forrest McDonald, Novus Ordo Seclorum (Lawrence, Kan.: University Press of Kansas, 1985), p. 7.
3. Ludwig von Mises considered peaceful changes made possible by constitutional democracies as this form of government’s “main excellence and worth.” Ludwig von Mises, Theory and History: An Interpretation of Social and Economic Evolution (Auburn, Ala.: The Ludwig von Mises Institute, 1985), p. 372.
4. In Marbury v. Madison, 1 Cranch 137, 163 (1803), Justice Marshall wrote “The very essence of civil liberty certainly consists in the right of every individual to claim the protection of the laws, whenever he receives an injury.”
10. The argument that regulation is a partial confiscation of property may be found in Richard A. Epstein, Takings: Private Property and the Power of Eminent Domain (Cambridge: Harvard University Press, 1985), pp. 93-104.
11. For example, “retroactive, strict, joint and several liability” gives the Environmental Protection Agency authority to make a company pay for violating a standard that may have been adopted after it departed from a site. A single company with “deep pockets” can be forced to fund an entire cleanup even though its contribution to pollution on the site was marginal. This is why a third of the $30 billion spent on 200 Superfund sites has been for litigation expenses with each site taking an average of twelve years to clean up. James M. Strock, “Wizards of Ooze,” Policy Review (Winter 1994), p. 42.
12. This measure would presumably disqualify regulations such as the Occupational Safety and Health Administration standard for Benzene that costs $23 million per life saved and the Arsenic standard costing $24 million. John Hood, “OSHA’s Trivial Pursuit,” Policy Review 73 (Summer 1995), p. 60.
17. Assertions of fairness and justice may also represent a conscious attempt to deceive the public. The outcome of preference seeking is the same whether or not the entrepreneur is sincere in his public declarations.
18. Seeking preferences and privilege necessarily violates a principle of ethics expressed by Immanual Kant thusly: “Act in conformity with that maxim and that maxim only which you can at the same time will to be universal law.”
19. For a discussion of courage and honor see Alexis de Tocqueville, Democracy in America, ed. J. P. Mayer, trans. George Lawrence (Garden City, N.Y.: Anchor Books Edition of Doubleday & Company, Inc., 1969), pp. 616-627.