The Economics of the U.S. Constitution
The following lessons first appeared in the Fall 1986 issue of The Senior Economist, a publication of the Joint Council on Economic Education (JCEE) for secondary teachers of Economics, Government, United States History and World History. As such, please remember that author biographical information is correspondingly out of date.
We recommend that you read the article by Douglass C. North (this page), as each of the lessons make reference to it.
Teaching Activities: Economics – The Constitution: An Economic Framework
Teaching Activities: U.S. History – Enduring Constitutional Issues: The Economic Role of Government and Coining Money
Teaching Activities: Government – The Federal Government and Interstate Commerce
Teaching Activities: World History – Evolution from Mercantilism to Capitalism
The JCEE was the forerunner to the present National Council on Economic Education. Regrettably, The Senior Economist is no longer in print, but selected back issues are available from the COCEE Library. A list of those issues and their themes is provided after the following article by Douglass C. North.
By Douglass C. North
Professor Douglass North is Luce Professor of Law and Liberty in the Department of Economics at Washington University in St. Louis and Director of the Center in Political Economy. He was editor of the Journal of Economic History for five years and was recently appointed editor of the Cambridge Series of books and monographs on “The Political Economy of Institutions and Decisions.”
It is now two hundred years since the Constitutional Convention drafted the Constitution. That document thus is one of the most durable sources of rules in all of history. However, its origins and its significance have been and continue to be a source of controversy. In this essay, I shall try to provide some tentative answers to the following questions. 1) How did the Constitution come to be written as it is? 2) Whose interests were served by the document? 3) What does it say? 4) How important was it at the time and for subsequent generations? 5) What are the lessons to be learned with respect to calling a new constitutional convention to rewrite it?
How Did the Constitution Come to be Written as It Is?
It is not often that people get a chance to shape their own history from the ground up. Usually we think of history evolving in an incremental way, through the choices and decisions of people as they stem one from another through time. But the Constitutional Convention that followed the creation of the new nation certainly presented the opportunity for its convenors to create an entirely new set of rules. However, both the past and the issues of the time provided constraints. The ideas embodied in the Constitution were forged in the struggle between Parliament and the Crown in the revolutionary 17th Century in England, by the charters of the colonies, and by the ideas that were current in 18th Century England.
The year 1776 produced not one but two documents of historically significant importance to the new nation. One, of course, was the Declaration of Independence. The other was Adam Smith's Wealth of Nations. In the course of writing what has come to be thought of as the foundation stone of modern economics, Smith inveighed against the evils of the system that he perceived had dominated England and Europe up to that time, a system he called mercantilism. Mercantilism was a system in which the government was deeply involved in the operation of the economy, providing subsidies, bounties, and monopolistic privileges to individual companies through the assignment of exclusive privileges and trading rights. Adam Smith felt that mercantilism was an inefficient system that fostered monopoly. In contrast, Smith argued that the main basis for economic growth and efficiency was specialization and division of labor. Efficiency came from specialization in the production and distribution process. He argued that by allowing each person to concentrate on doing just one thing repetitively, goods could be produced more rapidly and efficiently. He believed that competition in the market would force people to become more efficient and would encourage improvements in technology and productive expansion. Thus, rather than artificial inducements to produce: bounty and subsidy, Smith believed that free markets, which valued the relative gains of producing different kinds of things, provided the proper incentives for productive economic activity.
The conflict between Adam Smith's view and the traditional mercantilist view was certainly much in the minds of the Americans in the 1780s as they struggled to resolve the many problems they faced. Separated from England , they no longer enjoyed the privileges of operating within her Navigation Acts, which had assured the colonies protected markets against foreign competition. Moreover, at home they faced huge debts accumulated in the course of the Revolutionary War (including the problem of paying the soldiers of the Revolutionary War who had been promised substantial benefits), the need to raise taxes to operate government, and the need to provide protection to traders against Barbary Pirates in the Mediterranean.
And it was not just the ideas and the issues of the time that turned out to be decisive for this remarkable document. An extraordinary concatenation of events also affected it. Initially the Convention was called simply to overhaul the Articles of Confederation. The convenors were heavily loaded in favor of federalists rather than anti-federalists. Many anti-federalists believed that the Convention would be a failure and that they could do very little to improve conditions; thus, they simply would have nothing to do with it. What actually happened was quite different. The views of the convenors turned out to be near unanimity with respect to what ought to be done, and in short order they wrote a completely new constitution. Contrary to the anti-federalists, the federalists believed the new nation was in crisis and that in the absence of a new constitution it could not be held together. To assure and speed ratification, they suggested amendments to the Constitution that would be undertaken as soon as the new Constitution came into existence and the first Congress had been convened. Thus, the Bill of Rights was actually guaranteed in the course of the ratification controversy; in fact, it was essential for the success of ratification. As a result, the anti-federalists, who foresaw failure at the Convention and failure in the ratification process, were confronted instead with a feasible document, which, with the additional guarantee of the Bill of Rights, also became a document that was ratified and that provided the basic rules of the new nation.
Whose Interests Were Served by the Document?
Was the Constitution a class document written narrowly in the interests of a small group? This controversy has existed ever since Charles Beard's celebrated book, entitled The Economic Interpretation of the Constitution, asked whether the Constitution reflected the disembodied wisdom of a group of disinterested individuals or a narrower set of interests of its framers. Put that way, the question is not a very interesting one. Surely the framers of the Constitution devised it in such a way that it was consistent with their long-run interests, but surely also their view was that it must be a viable political and economic document that could enable a nation to survive and thrive. In fact a major issue that shaped the writing of the Constitution was a concern with factions or interest groups of citizens bent on using the political process to further their own well-being. The most durable source of faction was the unequal distribution of wealth and income. In one of the most celebrated essays ever written in political theory, Federalist Paper No. 10 (written to support ratification), Madison argued that the aim of the constitutional convenors was to prevent factions from controlling the political system and using it in their interests. The Constitution did not make everyone equal. Some states did impose property qualifications in order to vote and therefore excluded the poorest members of society. Moreover, it is clear that the Constitution made it more costly to redistribute wealth from the rich to the poor than vice versa. Yet, it is equally obvious that this was not the prime consideration of the makers of the Constitution. The prime consideration, if we take Madison at his word, was to make all redistributive efforts by factions (of whatever kind) costly and to provide a framework that would encourage productive pursuits instead of redistributive efforts.
What Does the Constitution Say?
Overall, a major design of the Constitution, as the foregoing paragraph suggests, was to provide a set of checks and balances in the political process, so that no faction could, in short order, get control of the reins of government and redistribute wealth and income in their favor. This was done by providing for separate legislative, executive, and judicial bodies, each with checks upon the other, each with distinct and separate powers. State and federal government powers were also separated. There is no doubt that this federal form of government was an important source of decentralization in the political process and that it certainly raised the costs of an interest group coming to control the political process.
Now let's turn to specific economic issues. The Constitution enabled the federal government to levy taxes (an essential function of government if it is to survive), and to coin money and regulate its value. It gave the federal government authority over foreign affairs, including the negotiation of tariffs and treaties. It gave the federal government the right to regulate interstate commerce, thus prohibiting the states from erecting barriers to the interstate movement of goods, but also permitting the federal government to impose its own rules upon interstate commerce.
Certainly the more important contribution of the Constitution was that it established a framework for the efficient conduct of economic affairs. It defined the protection of private property and specified that contracts would be enforced; it stipulated rules for bankruptcy, an important element since bankruptcy implies a failure to live up to contracts. In short, it created a system of well-specified property rights, which reduced uncertainty and permitted the development of free markets - essential, in Adam Smith's view, for a productive economy.
How Important Was the Constitution at the Time and Subsequently?
Let me quote one of the leading students of the Constitution and one of the leading political scientists of our time, William Riker, Professor of Political Science at Rochester University .
“The Constitution was in a formal sense a necessary condition for those achievements. That is, had the Articles [of Confederation] survived, the nation would not have flourished. To see this, note the Constitution was, in a formal sense, necessary for political unity and the consequent political dominance of the United States, first in North America, expanding westward, then in the western hemisphere, restraining imperial expansion from Europe and finally in the world, helping to destroy, in two world wars, Western European monarchies and empires and countering the Soviet empire. All this depended on political unity; yet without the Constitution, North America might well have been as balkanized as South America.” (From “The Lessons of 1787,” Public Choice, forthcoming.)
Clearly the Constitution was critical and came at a unique juncture in American history. But it would be foolish to think that rules alone are what count. Deifying the Constitution as a source of all that is good, sound, and stable in American history is surely ridiculous, for it is not just rules, but how they are enforced and the norms of behavior that go with them that count. Let me quote Professor Riker again, in another context.
“Every time I convince myself that I have found an instance in which constitutional forms do make a difference for liberty, my discovery comes apart in my hands. . . it may just as easily be the case that the reason we have these constitutional forms is that we are a free people.” (Public Choice, 1976)
As Riker is suggesting in this quote, the attitudes and the norms of behavior of people are terribly important and may be more important than the rules themselves. In fact, it took the decisions of the Marshall Court of 1801 to 1835 to transform the rules into specific decisions that directly affected how the polity and the economy worked. In short, it took subsequent enforcement and, as Riker has suggested, it took the attitudes and behavior of a free people to see that it worked. After all, the U.S. Constitution has been emulated and copied in many parts of the world where it hasn't worked at all.
What Are the Lessons to be Learned?
The foregoing suggests the answer to whether the Constitutional Convention can serve as a guide and to whether a new convention should be called now to solve all problems. There is no quick fix for the problems of a society. The extraordinary success of the original Constitution was a result of timing; it convened at a critical period in American history and was forged by a group with immense ability and common interests who had to make very few compromises with those who didn't believe in creating those rules. In the absence of all those conditions, it is doubtful that we could ever again create a document which could serve us as well.
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Published by the JOINT COUNCIL ON ECONOMIC EDUCATION
Mark C. Schug, Editor, University of Wisconsin-Milwaukee
Michael A. MacDowell, President, Joint Council on Economic Education
Robert W. Reinke, Project Director, Joint Council on Economic Education
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