It Didn't Begin With LBJ: How The US Became A Transfer Society

... from “1877 to 1917 the Constitution was altered in numerous ways that made transfers much easier to obtain... all of these changes came through interpretation.”

Terry L. Anderson and Peter J. Hill’s fascinating account traces the decline of the American constitutional framework from its origins in laissez-faire individualism to its current state of redistributive collectivism. Viewing the evolution as a series of legal developments motivated by ever greater financial incentives to involve the federal government, they highlight the following pivotal cases: (1) Marbury v. Madison (1803), which established the Supreme Court’s right to perform judicial review, striking down laws it considered unconstitutional; (2) McCulloch v. Maryland (1819), which sanctioned Congress’s founding of the Bank of the United States, deemed that states could not tax instruments of the federal government and further solidified the basis for judicial review; (3) Ogden v. Saunders (1827), which ended the old, laissez-faire interpretation of the Contract Clause; (4) Munn v. Illinois (1877), which for the first time granted the state the power to control private property via the “public interest” argument; and (5) US v. Grimaud (1911), which gave administrative rulings the force of law, beginning the transfer of the lawmaking function from Congress to the president.

Emphasizing the role played by the courts, the authors show how from “1877 to 1917 the Constitution was altered in numerous ways that made transfers much easier to obtain. Except for the income tax amendment, all of these changes came through interpretation.” Furthermore, the “substitution of an equivocal concept like public interest for firm constitutional limitations meant that the subjective judgment of justices was supreme.” This set the stage for private interests to learn to benefit from governmental transfers: “There is no field in which industry expects, or gets more from its associations than that of relations with governmental bodies. This becomes true year by year, as government, and particularly the Federal government, plays an ever-increasing part in our business and industrial life.”

Unlike mainstream economists, the authors identify governmentally enforced transfers as negative-sum instead of as zero-sum games. Their reasoning, while cogent, can, however, be enhanced in its rigor by including insights from the Austrian School. Consider the following:

When [property] rights are transferred without some quid pro quo, a non-voluntary transfer takes place. The most obvious example of such transfer activity is theft. At first glance such activity might appear to be zero sum since one person’s gain is another’s loss. But this ignores the process through which the transfer is effected. The result of this transfer activity is negative sum since nothing is produced and resources are expended in the process. (The reader is reminded of our unwillingness to allow interpersonal utility comparisons.) A thief invests in physical and human capital to effect a transfer only if it nets a normal rate of return. Moreover, an owner invests in additional measures to increase the probability of capturing the return [of] his assets. Traditional analysis has viewed transfers of this sort as altering the distribution of income without affecting output since the total amount of goods in society remains unchanged. Thus, if A steals B’s car, traditional analysis says that no social loss has occurred, assuming the value to both individuals is equal. But this ignores the consumption of resources in A’s attempts to carry out the theft and B’s attempts to prevent it. The transfer itself may be costless, but the prospect of the transfer leads individuals and groups to invest resources in either attempting to obtain a transfer or to resist a transfer away from themselves. These resources represent net social waste.

In short, expenditures on predatory and protective activities constitute the “waste” that makes the total less than the sum of its parts. However, as Austrians have argued from several viewpoints (Ludwig von Mises’s book Human Action, Peter Klein’s essays, the research of Nicolai Foss et al.), the structure of ownership is itself an integral component of a society’s wealth; if assets are owned by individuals who put them to poor use, wealth is relatively diminished. Unlike nonvoluntary transfers, exchanges that arise voluntarily in the market are the mechanism by which ownership passes to those most qualified to use it ex ante. Thus, the new distribution itself constitutes a loss of value compared to that which existed previously irrespective of the resources expended on predatory and protective activities.

Furthermore, the authors claim that the state is justified in pursuing nonvoluntary transfers to rectify illegitimate property distributions and to eliminate the free-rider problem in public goods. The problem, they argue, is that once coercive redistribution is allowed for those reasons, special interests are incentivized to find ways to use it to benefit themselves:

Nonvoluntary transfers for the purpose of providing public goods may become positive-sum transactions. The problem is one of accurately defining a public good. If this cannot be specified then and therefore limited to only those goods from which nonpaying consumers cannot be excluded, legitimate powers specified in the constitution can and will be used for other types of transfer activity. Negative-sum games will result. Transfer mechanisms dealing with illegitimacy and public goods allow the camel’s nose under the tent. The problem is keeping the beast from obtaining full entry.

However, in neither of these cases is government action net value-generating. Regarding the illegitimacy question, the state has no competitors and thus faces no negative consequences for poorly resolving competing property claims. By comparison, private arbiters that become corrupted or have a poor reputation lose customers and are ultimately replaced by competitors, leading to losses for their shareholders. The state’s monopoly on coercion, however, cannot be withdrawn, and so it lacks such a corrective mechanism (which is significant in light of its susceptibility to abuse by special interests). In the case of public goods, on the other hand, even if the state were somehow capable of operating without transaction costs or extracting resources, it could only finance value-destroying ventures because value-generating undertakings are already voluntarily financed by profit-seeking entrepreneurs. Furthermore, the supposed need to combat the free-rider problem is entirely fallacious, for as Murray Rothbard points out, the definition of what constitutes free-riding is entirely subjective and arbitrary; it applies to everyone regarding the civilizational and technological achievements of both ancestors and contemporaries, and there is likely not a single benefit that accrues only to a single person. We can either accept this as a happy fact of life and let it be or tax away everything in pursuit of a confused conception of justice, bringing all economic activity to a standstill.

The authors also see a role for the state in maintaining the democratic nature of politics. They write that between the American Revolution and 1790, the number of land-owning Rhode Islanders decreased drastically, reducing the number of voters to one-third due to a land-ownership requirement for enfranchisement, and they conclude that “expanding the franchise was thus essential to maintaining a government based on the consent of the governed.” However, they then concede that, although appropriate, such changes increased the reliance on majority rule to an extent incompatible with constitutional restrictions on government. But that is precisely the point: The greater the number of individuals who can influence the state, the greater the potential for redistributive cooperation between them. If the state were just a well-meaning public institution, diligently providing police, military, and courts at minimum cost, there would be no connection between the number of voters and constitutional restrictiveness. Only if the state is an alternative marketplace with profit opportunities for political entrepreneurs does an increase in voters (competitors for government handouts) result in greater clamor for the removal of restrictions on government, since every government action is an opportunity for someone to benefit at the public’s expense.

The authors end by proposing a return to the original conception of government, its roles and limitations, along with the removal of the political and legal bases for the statist developments that have occurred since the nineteenth century. As they put it, it is essential “that the concept of a government limited by a set of fundamental, difficult-to-change rules dominate our thinking.” Anarcho-capitalists will counter that the only true guarantee of freedom is through competition in the free market. Regardless of one’s stance on that debate, however, Anderson and Hill’s book provides an illuminating account of the decay of constitutional safeguards and warrants serious study.

Authored by Eduard Bucher via The Mises Institute