The Constitution - An Economic Document

 

Opinions and Evidence - The Constitution, as written and ratified, was more than a political document, for it also provided the new United States a framework conducive to economic growth. As conceived by the framers, and as interpreted during the first sixty years of the republic, it effectively encouraged positive-sum entrepreneurial activity and discouraged wasteful privilege-seeking. However, changing interpretations of the Constitution since the late 19th century, have made privilege-seeking much more profitable.

Outline

1. U.S. emerged from the Revolution with many economic problems
   1. No longer had the advantage of protected markets that the Navigation Acts had given them

   2. Huge war debts - both internationally and to soldiers who had fought in Revolution

   3. Needed money to operate government, to provide national defense, and to protect commerce from Barbary Pirates

   4. Government under the Articles of Confederation was not strong enough to address pressing financial and economic problems

2. Philadelphia Convention attended mostly by men who shared agreement in need for strong central government
   1. The Declaration of Independence and the Wealth of Nations, both written in 1776, influenced the writing of the Constitution
      1. Americans, and especially the Framers, were well aware of the differences between Adam Smith's view of the role of government in the economy and the traditional mercantilist view

      2. The Federalists, who tended toward Smith's view, included most members of the Philadelphia Convention

   2. The embodiment of Smith's market philosophy in the Constitution laid a foundation for economic success that would not have been possible had the Articles of Confederation prevailed

3. The Constitution created the basis for a sound economy
   1. The power to tax and control the money supply (Article I, Sect. 8) formed the basis for development of a sound capital market

   2. Power to promote and regulate trade (Article 1, Sect. 8) fostered growth

   3. Fears of factions and radical redistribution of wealth formed basis for Fifth Amendment

   4. The Constitution defined the rights to private property and specified their protection

4. The Constitution created the basis for a true unification of the states into a nation
   1. The framers' concern with safeguarding the nation from the disruptive potential of factions is evident throughout
      1. Madison, in The Federalist #10, tells of the framers' concern to block the actions of factions and other groups trying to use the government to promote their own well-being

      2. The framers intended to make a government that would encourage people's own productive efforts rather than their pursuit of redistributive favors

   2. The design of a federal system and a process of checks-and-balances was effective in creating unity and avoiding the divisiveness that is the inevitable result of redistribution of wealth by powerful factions

5. Over time, changing interpretations of the Constitution made privilege-seeking more profitable
   1. The Supreme Court's decision in Munn v. Illinois (1877) opened the way for government redefinition and transfer of private property rights

   2. Court cases around the turn of the century continued the expansion of government powers and the weakening of property rights

   3. The New Deal resulted in substantial changes in Supreme Court interpretations of the Constitution that further increased favor-seeking from government

Connections to Economics

Rules of the Game - In what ways do the powers of central government influence the types of economic activities the members of a society choose to engage in? What fundamental rules were set up by the Constitution and how did those rules impact American economic growth and development? How have the rules changed and what has been the impact of those changes?

Trade-offs - How did the Constitution solve the problem of power? Was it successful in creating a balance in which government has enough power to constrain predatory actions by private citizens, but is itself constrained from predatory behavior?

Incentives - Why do high transaction costs preclude potential gains from trade? How did the Constitution effectively lower transaction costs and thus encourage people to seek mutually profitable exchange? Are the incentives incorporated in the Constitution still effective in encouraging positive-sum entrepreneurial activity?

The Economic Way of Thinking - Government can be a facilitator of exchange and thus can aid in the creation of wealth. On the other hand, when the rules of the game are such that citizens are encouraged to seek economic advantage through government favors, resources are wasted and economic growth is inhibited. The Constitution, as originally framed and interpreted, served to limit such favor-seeking and to promote positive-sum economic activity.

Economic Concepts that support the historical analysis:

• inflation
• private property rights
• public goods
• transaction costs
• money supply
• taxation
• entrepreneurship
• mutually beneficial exchange