We hear a lot about the free market approach to policy problems, much of it couched in terms that imply that free markets are in some sense “natural,” or that free markets are the grand tradition of our country which nefarious politicians are attempting to undermine. The question whether free markets might be “natural” to humans is a complicated one, relying on a picture of individual human nature which I’ve already criticized. The same acquisitive nature that makes man a competitive market being can also hamper markets when it becomes anti-competitive, and thus libertarians admit that government is necessary at least to restrain monopolies and trusts. In a sense, libertarians (and all other rights-based thinkers) support competition, but not scorched-earth victory.
But my topic today is instead the role of the free market in our nation’s history. As I said, free market policy proposals are often put forward with the implication that markets are the default setting in American life. Obama is charged with wanting to “supplant” free market capitalism with socialism. Regulation is an “interference” with the operation of free markets. Surely, socialism is alien to American traditions (and alien to the Obama administration as well, but that’s the subject of a different post); and a norm against the over-regulation of commerce is one of the hard-won insights of American history. But this doesn’t mean that free-marketism has been the norm in the past; or that the absence of regulation has ever been the status quo.
In fact, the American economy from our founding onwards grew in a symbiotic relationship with government action. And we forget that history at our own peril. As important as the American self-image of entrepreneurship is, our government has (which is to say, we collectively have) always been active in creating the playing field on which commercial competition occurs. We build the field, and we shape its rules – and when we re-shape its rules we are not interfering with time-honored and sacred rights, but merely making the sort of collective decisions aimed at our shared progress which we have always made.
In the early 19th Century, state governments chartered the first corporations as a method of encouraging public improvements (say, building a bridge across the Charles River in Massachusetts, or laying and maintaining usable roads in Pennsylvania). The “corporation” in its inception was a private or semi-private entity aimed at encouraging individuals to team together for public purposes by granting them public lands (and sometimes private lands taken by eminent domain) as well as a right to the profits made by their improvements.
In the late-19th Cenury, government owned most of the land in America, and enacted policies meant to encourage the peopling of the West and the improvement of those lands. It sometimes granted rights to water or land to railroad companies, who would have an interest in creating and fostering towns in the Midwest and West so they could transport the goods produced to the East. And it also granted certain bundles of property rights to individuals to encourage them to go west. Our government fostered what we might think of as one of the largest public-private-popular cooperative schemes in the history of man. (This story is necessarily truncated here, but for an excellent retelling of the role of the government in distributing property rights in the American West, see this book by Donald J. Pisani.)
Indeed, the notion that government and “private” corporations ought to work cooperatively to foster economic improvement was inherent in the Whig tradition (which became our American rights-based tradition) from the start. It’s ironic that libertarians have come to see it any other way, distorting the views of Whig thinkers like John Locke and pretending that they believed in absolute private property rights, separate and protected from the government. For example, libertarians have attempted to marshal Locke in opposition to eminent domain takings. This ignores the fact that Locke is seen by legal history scholars as something like the grandfather of eminent domain law in the United States.
In his 1669 draft of the Fundamental Constitutions of Carolina, Locke included this provision giving the government an expansive power of eminent domain:
“The court shall have power, also, to make any public building or any new highway, or enlarge any old highway, upon any man’s land whatsoever; as also, to make cuts, channels, banks, locks, and bridges, for making rivers navigable, for draining of fens, or any other public uses; the damage the owner of such land, on or through which any such public thing shall be made, shall receive thereby shall be valued, and satisfaction made, by such ways as the grand council shall appoint.”
Locke was thinking here of the Crown’s taking of fens and forests in 17th Century England, for the purposes of economic improvement (turning waste lands into arable farm lands by draining and/or clearing them). And while he clearly specifies in The Second Treatise that government ought never to take all or any part of such lands for itself (§139) as was the Crown’s common practice, he just as clearly approves of government’s cooperation with private individuals in improving the values of land (even land that is already privately owned by another).
The Whig tradition in fact carried through into American history at least into the Progressive Era. Think, for instance, of the numerous bills for the building of canals and other public improvements that Abraham Lincoln supported as a Whig congressman.
There isn’t enough space here to write an entire history of American Economic Development through the lens of the public-private-popular triumvirate which I’ve suggested here. But I do want to finish with a couple of the lesson to be gleaned from this history.
The first is that government and corporations cannot be disentangled. Libertarians will surely admit that government must exist to charter corporations and to enforce corporate contracts. Without this chartering role, there would be no way to guarantee the immense spur that “limited liability” gives to enterprise. And without the enforcement role, no way to lock in sure gains-from-trade. But even to engage in these functions means to make decisions about public values – when we establish just the basic shell of rules for corporations (governance structures, for instance) we decide what values the corporation serves in our society. To take one relevant example, making executive compensation an issue for a board of directors to decide is to tilt that decision in one direction; giving shareholders an effective vote on the question is to tilt it in another. Yet there is no way for a government that charters corporations to avoid this decision: it must decide how that decision will be tilted. This is not to mention the myriad other value decisions we also must make (no one would expect the government to extend limited liability to a mafia protectionist racket – our rules must determine what is a legitimate “business”). Just as in the first days of our republic, when we charter corporations and enforce their contracts we are pursuing the public good; and it is disingenuous for libertarians to argue otherwise, pretending that their rules for corporate governance are the “natural” ones whereas any changes are interferences.
But this is not to say that all government attempts to regulate companies for the public good are ipso facto praiseworthy. This is the second lesson of our history. The American public-private-popular partnership is riddled with missteps, half measures, false starts, and plans gone awry. In fact, government’s role has sometimes been most successful when it has allowed the other two players to move first, and only then followed on to formalize the rules that have already been developed (for an excellent argument along these lines, see Chapter 5 of de Soto’s _The Mystery of Capital_). It is true, that government is best which governs least – but this does not mean that a government can govern not at all. Through experimentation our government has learned (and is learning) to regulate in ways that achieve good public ends through the means most likely to achieve those ends and least likely to hamper corporations. This is the best expression of our tradition of three-pronged partnership – an activist government protective of the public good, but respectful of private enterprise.