I had a fun session with nine students from George Mason University’s economics department last night at the informal law and economics seminar I’m conducting once a month at GMU. The seminar is sponsored by the GMU Econ Society, a student group interested in libertarianism and Austrian economics. They also serve as the co-sponsors of our Economic Liberty Lecture Series at GMU.
I thought I would share with you some of the things we discussed last night.
The seminar revolves around the famous (statists say infamous) case of Lochner vs. New York, which was decided by the Supreme Court in 1905. Lochner is one of the most condemned and vilified (by statists) decisions in the history of the Court and remains controversial to this day. In fact, just recently, in the days preceding the Court’s decision on Obamacare, President Obama said, “A law like that has not been overturned at least since Lochner.”
In recent years, libertarian scholars, both economic and legal, have caused the debate over Lochner to be renewed. They argue that the Court got it right in Lochner and that it was wrongheaded for the Court to have later abandoned the principles set forth in Lochner.
Lochner involved a New York state law that set a maximum 60-hour work week for employees engaged in the bakery business. Lochner, a baker, violated the law and was criminally prosecuted, convicted, and punished by the state of New York. He appealed his conviction all the way to the Supreme Court, arguing that the law violated the due process clause of the 14th Amendment.
What we did last night was build up the context and background to Lochner.
We begin with 1776. The Declaration of Independence enunciated the revolutionary principle that people’s rights don’t come from government. Instead, they come from nature and nature’s God. As such, they precede government. That principle shocked the world, given that people had long believed that their lives belonged to the king and that he had the sovereign prerogative to do whatever he wanted to people lives, freedom, and property.
There was another big revolution in 1776: the publication of An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith.
For centuries, government had managed and controlled economic activity. There were, for example, anti-speculation laws, which prohibited middlemen from buying farmer’s food before it reached the village market and selling it at a higher price. Producers were instructed on how to produce their goods. Detailed regulations instructed seamstresses on how sweaters were to be constructed.
The idea had always been that government management and control of the economy was essential, especially as a way to help the poor. Hardly anyone questioned it.
Then along comes Adam Smith and turns all that on its head. The key to the wealth of nations — the key to rising standards of living, especially for the poor — is to prohibit the government from managing, controlling, or regulating economic activity.
Needless to say, that was a shocking notion to people everywhere.
So, we have two revolutionary events taking place in 1776, which interrelate with each other. We have the enunciation of the principle that people have rights that preexist government. And we have the enunciation of the principle that the key to economic prosperity is to prohibit the government from managing or regulating economic activity.
Let’s jump ahead to 1787. Americans had been operating under the Articles of Confederation, which provided for a very weak central (federal) government. Representatives go to the Constitutional Convention with the aim of coming up with reforms of the Articles. Instead, they come up with the Constitution, whose aim is to call a brand new central government into existence.
Many Americans were opposed to the idea. Why? They knew what the British government and, for that matter, all other governments had done to their own people. The government would steal their wealth through confiscation and taxation, take them into custody if they objected or criticized the government, torture them, hold them indefinitely without trial, and even kill them. Americans had no interest in returning to that sort of life.
The Framers, however, had an answer. They said that this time things would be different. With the Constitution, the people would be telling the government what it could and could not do. That was the idea behind the enumerated-powers doctrine. The Constitution would call the new federal government into existence but, at the same time, limit its powers to those enumerated in the document.
Once again, that principle shocked the world. People simply couldn’t conceive of a system in which the citizenry were telling the government what it could and could not do. They were too accustomed to living under regimes in which the government wielded omnipotent power over them.
Americans finally went with the deal, but reluctantly. As a condition to approving the Constitution, they demanded a Bill of Rights to make doubly clear how concerned they were about the potential threat that they believed the new federal government would pose to their freedom and well-being. The Bill of Rights, which really should have been called a Bill of Prohibitions since it doesn’t grant rights at all, expressly prohibited the government from infringing on the natural, God-given rights of the people.
Of special note were the Fourth, Fifth, Sixth, and Eight Amendments, whose guarantees were designed to obstruct attempts by the federal government to round up people arbitrarily, cart them away to a military dungeon, prison, or concentration camp, torture them, or execute them, all without judicial process. Our American ancestors were certain that there would be federal officials who would want to do such things, given that that’s what government officials throughout history had done. Our ancestors made it clear that this was prohibited under our constitutional order.
The result of Adam Smith’s Wealth of Nations, Jefferson’s principle of natural rights in the Declaration of Independence, the Constitution’s enumerated-powers doctrine, and the Bill of Rights brought into existence the most unusual society that has ever existed in history—one that could easily be described as “exceptional.”
No Social Security, Medicare, Medicaid, income taxation, immigration controls, welfare, drug laws, gun control, public schooling, government management of the economy, standing army, and foreign wars and few economic regulations, agencies, departments, and bureaucracies at the federal level.
Were there economic regulations at the state and local level? Of course, which shouldn’t surprise anyone, given that that was the type of system in which people had lived for centuries. There were also tariffs and slavery at the national level. But what was remarkable — and exceptional — about America was the absence of a dominant role for the federal government in people’s everyday lives and economic activity. That had never before happened in the history of the world.
The result was the greatest outburst of creative energy that mankind had ever seen. There was a reason that penniless immigrants were flooding American shores every day, fleeing the lands where governments were taxing and controlling people and involving them in endless wars and coming to a land where the government was leaving people alone. The poor were getting wealthy. Adam Smith was being proven correct: The less government involves itself in economic activity, the wealthier the society would become.
We also mustn’t forget the country’s exceptional monetary system. While the Constitution gave the federal government the power to coin money, it did not give it the power to print money. The result was a monetary system based on gold coins and silver coins as the official money of the United States. That’s what was meant by the “gold standard” — not printed money backed by gold but instead gold coins and silver coins as the official money of the country. It was a phenomenon that was another major contributing factor to the rise of massive capital accumulation, enormous increases in productivity, major increases in real wage rates, and soaring economic prosperity.
By the time the end of the 19th century approached, the standard of living of the American people was soaring, consistent with what Adam Smith had said. For the first time in history, the poor actually stood a good chance of becoming wealthy or at least reaching middle-class status in one generation.
And then came the Progressive movement, which sets the stage for Lochner v. New York.