From constitutional laissez faire towards economic and social rights: Examining the influence of the legal realists and the institutional economists in the emergence of economic and social rights in the United States within liberal theory

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Sally-Anne Way, Upgrade Chapter, 11.11.2011 |

From constitutional laissez faire towards economic and social rights: Examining the influence of the legal realists and the institutional economists in the emergence of economic and social rights (in the United States within liberal theory1)

In this chapter, I will argue that much of the groundwork for the emergence of ideas of ‘economic and social rights’ in liberal thought was laid in the ‘revolt against formalism’ and against ideas of ‘natural rights’ and ‘natural law’ in both law and economics by the American legal realists and institutional economists over the period 1880-1930. Just as the legal realists sought to challenge the deductive formalism of ‘law as science’ and its apolitical pretensions, the institutional economists sought to challenge a similar trend towards deductive scientism and attempts to cast economic laws as inexorable, apolitical ‘laws of nature’. Both the legal realists and institutional economists attacked formalism, but many of them were attacking more than that; they were attacking what was being formalised. They were attacking the formalisation, ‘naturalisation’ and constitutionalisation of laissez-faire liberalism and the primacy of the classical liberal rights to property and liberty (understood as freedom of contract) in what was coming to be called the ‘rule of law’ or simply the ‘law’. In the face of the empirical brutality of industrialisation, the massive concentration of economic power and the ravages of inequality, the legal realists, like the institutional economists and the progressives before them, sought to show that the law, like the market, was not natural, neutral or even necessary – both were historically contingent, socially constructed and indeed mutually constitutive. The laws of economics – and the distribution of wealth and power they implied - were not natural and inexorable, but were socially constructed and could thus be changed. ‘Natural’ rights were not natural and ‘laissez faire’ was a myth; so-called ‘free’ markets were shot through with all sorts of coercion, most obviously the coerciveness of the massive economic power of corporations, and less obviously the coercion of the state through the enforcement and privileging of particular rights to property and to liberty of contract, to the exclusion of other kinds of rights. These theorists thus challenged laissez faire liberalism, economic power, and economic inequality, opening up the way to new thinking about rights. I argue that economic and social rights emerged out of this critique of classical laissez faire liberalism and were conceived in terms of a broad shift towards a new conception of freedom from the market rather than freedom of the market, marking the start of a new era of ‘embedded liberalism’. These ideas came to be reflected in Roosevelt’s proposal for an ‘Economic Bill of Rights’ and in the legislative and administrative project of the New Deal of the 1930s, as many of these theorists became key actors in the Roosevelt’s administration. The New Deal was partly an effort to shift what was being formalised through the creation of a new legal and economic orthodoxy, reflecting the wider shift in liberalism that these theorists had helped to initiate. Although economic and social rights never reached the status of constitutional rights in the US, there was a marked shift in constitutional philosophy of the Supreme Court from 1937 onwards. And although these rights remained contested domestically, they were ‘formalised’ internationally as universal human rights in the 1948 Universal Declaration of Human Rights, no longer grounded in ideas of ‘natural law’ but in a no less ethereal notion of ‘human dignity’. Paradoxically then, the revolt against formalism has led to a new kind of what I call ‘strategic formalism’ and a new liberal ‘theology’ of universal human rights.


While American Legal Realism has been caricatured and even ridiculed as the ‘gastronomic theory’ of law, given Jerome Frank’s irreverent assertion that a judge’s decision could be determined by what he had for breakfast as much as by the ‘law’2 - the legal realist movement was in fact a profoundly unsettling challenge to contemporaneous legal orthodoxy, which continues to have unsettling implications today. Although much of the legal literature sees legal realism as confined to the period between 1920 and the early 1930s on the basis of Karl Llewellyn’s rather idiosyncratic branding of the ‘movement’,3 I follow the wider definition adopted by Horwitz which includes a broader swathe of important jurists from Supreme Court judges, Holmes to Brandeis to Cardozo and Frank, others such as Wesley Hohfeld, and the institutional economists, especially Richard T. Ely and John R. Commons, as well as Robert Lee Hale and Adolph A. Berle, covering a significantly longer period from approximately 1880 to 1930.4 American legal realism was not, as Horwitz has pointed out, ‘a coherent intellectual movement’ and nor was it emblematic of a ‘consistent or systematic jurisprudence’5, but it did have one key unifying thread, which was a broad attack on ‘legal formalism’ – or what Oliver Wendell Holmes acidly called ‘legal theology’6 and Jerome Frank later labelled ‘legal fundamentalism’7.

This ‘legal formalism’ is often characterised as that of Christopher Columbus Langdell, (appointed Dean of Harvard Law School in 1870) who argued that law should be seen as a science with the library of caselaw as its workshop,8 although its principles should be based on the cases that were ‘right’ rather than the cases were ‘wrong’.9 Jerome Frank, in his irreverent style, contrasted ‘legal realism’ with ‘legal Bealism’ after Joseph Beale (a member of Harvard Law School faculty from 1890-1937) who had called for laws based on the ‘purity of doctrine’, free from the ‘warping of bad precedent’. 10 The underlying jurisprudential premise was that “there is such a thing as the one true rule of law, which being discovered, will endure, without change” and that judges should base their decisions on this true rule of law.11 Gilmore acerbically suggests that this concept of law had acquired such an “extraordinary hold” on the legal and popular mind at the beginning of the 20th century, that Benjamin Cardozo’s “hesitant confession” in his 1921 book The Nature of Judicial Process “that judges were, on rare occasions, more than simple automata, that they made law instead of merely declaring it” was “widely regarded as a legal version of hard-core pornography”.12 Many of the legal realists by contrast, suggested the judicial decisions should be understood sociologically, rather than relying on illusory deductive principles of law, that they should allow for the creativity of judges in the face of change based on inductive analysis of concrete social reality and empirical evidence available from sociological and statistical data about the actual harms caused in particular cases.13 Decision should also take account of the likely consequences of legal decisions, through an understanding the social contexts in which the legal rules would operate.14 In other words, the ‘law in action’ and pragmatic, sociological reasoning was just as, if not more, important than the ‘law in books’ or reasoning from legal precedent. Holmes was already suggesting this in 1897 in his Path of the Law where he declares:

“It is revolting to have no better reason for a rule of law than that so it was laid down in the time of Henry IV. It is still more revolting if the grounds upon which it was laid down have vanished long since, and the rule simply persists from blind imitation of the past.”15

Institutional economics was similarly engaged in a ‘revolt against formalism’ that took place in economics, more or less at the same time that it was taking place in the law, between around 1880-1930. The institutional economists were made up by young American scholars after World War I, but drew heavily on the earlier turn-of-the-century economists such as Thorstein Veblen and John R. Commons.16 Like legal realism, institutional economics cannot be described as a coherent intellectual movement, and nor was it a systematic set of approaches to studying economics, but it similarly represented a profound challenge to contemporaneous economic orthodoxy. Its key unifying thread was the challenge to the increasingly formalistic and increasingly mathematical doctrines in economics.17 ‘Economic formalism’ was understood as the reductionist project of orthodox economic analysis to abstract deductive reasoning to derive a particular set of axioms that could then be formalised – mathematically - and generalised as universally applicable.18 The institutionalists argued that this classical doctrine rested on assumptions that bore little relation to reality, and disparaged the classical economists as being “extraordinarily incurious as to what was actually going on”. The institutionalists promoted inductive analysis of the institutions of the actually existing economy, rather than the sterilities of static equilibrium theory. Drawing from the earlier German historical school, they emphasised the dynamics of change, and the “need to use empirical data (rather than abstract ideas) to ground economic theories, and the necessity of paying particular attention to human institutions”.19 Drawing also from the earlier studies by Veblen, the institutional economists paid particular attention to the social construction of those institutions and the ways in which they exercised economic power. Following John R. Commons, they also focused closely on the legal-economic nexus and the peculiarly legal construction of economic institutions.20 Together with the legal realists, these economists made up what Herbert Hovencamp has described as “the first great law and economics movement.”21

In this chapter, I will first argue that the ‘revolt against formalism’ was more than simply a revolt against the formalisation of general principles of law and economics; it was a revolt against the kinds of principles being formalised. It was a revolt against laissez faire liberalism and the very restricted notions of rights conceived as those grounded in an absolute right to property and a derived right to freedom of contract.22 It was an attack on what was being formalised – or as Horwitz has pointed out, against attempts to “freeze’23 particular ideas into legal doctrine and inexorable economic laws. I will then look at how these theorists questioned the classical liberal tenets of both law and economics and opened up new ways of thinking about rights and the role of the state. I will suggest that this challenge to classical liberalism was nothing less than setting the groundwork for a new type of liberalism that emerged in Roosevelt’s New Deal of the 1930s and in the ‘embedded liberalism’ that emerged after 1945. I will argue ideas of ‘economic and social rights’ emerged out of this challenge to classical laissez faire liberalism and that they reflected new ideas of freedom from the market rather than freedom of the market – or rather ideas of a state duty to protect citizens from powerful market actors, rather than protecting the freedoms of those powerful market actors. These ideas were eventually expressed domestically in the US in the political speeches of Franklin Roosevelt, and although new ideas were stifled domestically US in the repressive environment of the Cold War era after the 1940s, they were pursued through the formalisation and ‘constitutionalisation’ at the international level in the 1948 Universal Declaration of Human Rights. I will conclude that much of the groundwork for the emergence of economic and social rights was thus laid in the ‘revolt against formalism’. I will also reflect critically on how this also laid the groundwork for a new kind of formalism expressed through a new liberal ‘theology’ of human rights – and I will introduce the concept of ‘strategic formalism’ to explain this new formalism – though even this new theology has struggled in the face of the resurgence of market fundamentalism in economic neoliberalism.

Revolting against the laws of laissez faire liberalism

Under classical liberalism, it was assumed that state was the main threat to the individual through its potential to abuse its coercive power, and thus the role of the law was to set limits on the power of the state. In classical laissez faire economic liberalism, this idea was extended to suggest that the state should be limited to a ‘night-watchman state’ and refrain from abusing its power by engaging in arbitrary interference in the private sphere of the economy – including interfering with the ‘natural’ rights to liberty and property.24 Economic liberalism was grounded in the notion of the ‘self-regulating market’ which, if left free from interference by the state, will automatically create a harmony between individual interest and social welfare through the operation of an ‘invisible hand’.25 The unhindered operation of the market results in the best possible outcome - both in terms of the most efficient distribution of resources, and in terms of the most ‘just’ distribution of resources - given that it will result from the neutral operation of neutral market forces (as opposed to coercive redistribution by the state).26 Under the ‘marginalist revolution’ that occurred at the end of the nineteenth century, it was also argued that the competitive market would pay labour an amount exactly equal to the value each individual added, so in the absence of monopoly, wages could never be unjust.27 The operation of markets is by free and voluntary exchange, so it is never coercive, and any economic power that might exist through monopoly is assumed away as it will be quickly dissipated by the workings of competition in the market mechanism. The state must refrain from interfering from the operation of this market mechanism, which operates perfectly in the absence of interference, and any form of state regulation or redistribution which would likely have unexpected and unjust consequences.28

The classical economists sought to cast the laws of economics as natural and discoverable like the laws of physics – and argued that it was the duty of the state to allow the inexorable operation of these immutable, inexorable economic ‘laws of nature’. Classical economic theory, in works such as Herbert Spencer’s 1851 Social Statics and 1891 Justice (where Spencer coined the expression before Darwin of the ‘survival of the fittest’) grounded this version of liberalism in the sacredness and inviolability of the rights of property and the freedom to exchange that property.29 As Kennedy points out, the classicists emphasised the ‘naturalness’ of existing institutions, the ‘freedom’ of economic processes – and they spent little time providing actual sociological or economic evidence for their claims, but rather spent time seeking to convince readers of the naturalness of the existing economic order, the ‘sacredness’ of property, the ‘absoluteness’ of property and contract rights and the ‘justice’ or ‘fairness’ of the ‘natural outcomes’ of the workings of these free processes.30

At the turn of from the 19th century to the 20th century however, this form of classical liberalism was increasingly under pressure in the face of the reality of economic conditions and increasing inequality. In the midst of rapid industrialisation and the consolidation of enormous corporate economic power in industry and finance (in the era of the ‘robber barons’) that was combined with cut-throat competition, social tensions were running high. Daily life was hard and workers faced long hours, low wages, and often dangerous industrial accidents and unsanitary conditions– trade unions had started to challenge employers for better working conditions and wages, and social reformers were calling for changes to improve living conditions.31 Throughout the period from 1880-1930, there was an ebbing and flowing in administrative and legislative attempts to challenge the power of large corporations and to provide more rights and benefits to working people, but this faced powerful resistance - including resistance of the federal and state courts in the United States, which overturned much social legislation on the basis of its ‘unconstitutionality’. As the ever insightful Holmes dryly observed in 1897, “people who no longer hope to control the legislatures, [ ] look to the courts as expounders of the constitutions and in some courts, new principles have been discovered outside the bodies of those instruments, which may be generalized into acceptance of economic doctrines that prevailed about fifty years ago.”32

One case that has long served as a lightning rod of the legal realist debate is that of Lochner v. New York (1905) of the US Supreme Court. In that case, the Supreme Court ruled unconstitutional the 1895 New York State Bakeshop Act which limited the working hours of bakers to 60 hours per week for health reasons. Despite receiving evidence that workers were required to work excessive hours in appalling sanitary conditions that severely affected their health, the Court struck down the regulation, on the basis that the workers had freely entered into their work contract, and the state and the law had no business meddling with the right to buy and sell labour under conditions of ‘freedom of contract’:

“There is no reasonable ground, on the score of health, for interfering with the liberty of the person or the right of free contract…. Nor can a law limiting such hours be justified a health law to safeguard the public health, or the health of the individuals…. Section 110 of the labor law of the State of New York, providing that no employees shall be required or permitted to work in bakeries more than sixty hours in a week, or ten hours a day, is .. an unreasonable, unnecessary and arbitrary interference with the right and liberty of the individual to contract in relation to labor, and, as such, it is in conflict with, and void under, the Federal Constitution.”33

Justice Holmes’ in his (1905) minority dissent criticised the Court’s reading of the freedom of contract as a ‘perversion’ of the meaning of liberty in the fourteenth amendment, one that reflected laissez faire economic theory. He argued that the Court had decided the case on the basis of “an economic theory which a large part of the country does not entertain” and that the “Fourteenth Amendment does not enact M. Herbert Spencer’s Social Statics”, insisting that “[A] Constitution is not intended to embody a particular economic theory, whether of paternalism and the organic relation of the citizen to the State or of laissez faire.”34 Critical scholars, such as Duncan Kennedy, have pointed out that ‘freedom of contract’ is not expressly protected in the Constitution, thus the Court ‘invented’ this right of freedom of contract by reading it into the ‘due process clause’ – reflecting the ‘right-wing judicial activism’ of the Court during the ‘Lochner era’.35 Holmes at the time warned against the Court’s constitutionalisation of laissez faire, not because he was particularly progressive (he wasn’t), but rather because he did not believe that one particular set of logical axioms could ever resolve fundamental conflicts over legal theories or values.36 Holmes insisted that “General propositions do not decide individual cases” reflecting the reaction against general deductive propositions and anticipating the challenge to legal formalism. In his 1897 Path of the Law, he argued that “The danger of which I speak… is the notion that a given system, ours, for instance, can be worked out like mathematics from some general axioms of conduct”.

Writing in the context of rapid industrialisation and the rising inequality that was generating such social struggle, the legal realists, like the institutional economists and the progressives before them, took forward this revolt against laissez faire constitutionalism, reacting at the moves of the judiciary to strike down social legislation. More than attacking formalism then, they were attacking what was being formalised. They were also doing more than that – they were engaged in nothing less than setting the groundwork for a new vision of liberalism. They did this by challenging the central tenets of classical laissez faire liberalism. While the legal realists attacked the tenets of ‘classical legal thought’, the institutional economists attacked the key tenets of ‘classical economic theory’.37 In particular, they challenged the apparent neutrality and ‘naturalness’ of laissez faire principles. They showed that, despite the efforts of the legal and economic orthodoxies to present the state and the law as neutral, in fact both the state and the law were heavily implicated in structuring the ‘working rules’ of the economic game through the ways in which they coercively enforced private power - and the state and the law were thus heavily implicated in the distribution of wealth and economic power. Aside from the explicit references in Holmes’ dissent, these themes can be seen across a range of legal realist writings, including for example, those of Roscoe Pound38, Walter Wheeler Cook39, Morris Cohen40 and John Dawson41 and the writings of the institutional economists Robert Hale42 and John R. Commons.43 All of these worked in different ways to challenge classical liberalism, its peculiar legal institutions of property and contract, and the inequalities of wealth and power that these institutions were so manifestly producing.

The work of the legal realists and economic institutionalists undercut the key tenets of the classical liberalism by showing that the law, like the market, was not natural or neutral, or even necessary – they showed how the state, through its peculiar legal institutions coercively created markets in ways that were historically contingent and socially constructed, but thus could be changed. They argued that the assumed neutrality of these institutions was a myth - Robert Hale for example showed that the particular kinds of legal rules enforced by the state determined the distribution of income and wealth. Commons also argued that “the economists have taken the laws of private property for granted, assuming that they are fixed and immutable”, when such laws are in fact, and should be understood, as “changeable” as the rules of property have a “profound influence on the production and distribution of wealth.”44 To suggest then that judges and the law should not be involved in decisions that involved the redistribution of wealth, was to fundamentally deny that judges and the law were already thoroughly implicated in the extant distribution of wealth, through the entitlements enforced.

These theorists sought to show that notions of ‘laissez faire’ and ideas of ‘free markets’ were a myth – and that so-called ‘free’ markets were shot through with all sorts of coercion. Although classical theory assumed that only state power was coercive, with the concentration of economic power, it had become clear that private power could be equally, if not more, coercive (something which was difficult to deny in the era of the ‘robber barons’). One of the central preoccupations of institutional economics then was this rising power of corporations and the legal status conferred on this new form of association. The economist Adolphe Berle, for example, was concerned with the concentration of power that had arisen from the creation of the corporation – “the power attendant upon such concentration has brought forth princes of industry” and the separation between ownership and control had eliminated some of the traditional controls on that power. 45 This reflected a wider concern with the emergence of monopoly and trusts in the context of ‘race-to-the-bottom’ competition, which challenged the classical liberal image of the market as involving relations between sole traders and small businesses trading in relative equality. These concerns provided the impetus for the 1890 Sherman Anti-Trust Act and other trust-busting legislation.46

They also sought to show so-called ‘free’ markets were shot through with the coercion of the state, through the enforcement and privileging of peculiar rights to property and to liberty of contract - institutions that were historically specific, developed and designed to support the market economy.47 One key insight of the legal realists and institutional economists was to break down the sharp distinction between the public and private spheres, arguing that the state was fundamentally implicated in all “private” transactions.48 Laissez faire did not and could not exist because the market was never ‘self-regulating’, it was regulated by the state through the law of property and contract. Commons’ work on the legal-economic nexus in particular showed how the law and markets were mutually constitutive, and how the state itself determined the ‘working rules’ of the economic game, thus structuring apparently ‘free’ markets. Private power was largely constituted and enforced by the public power of the state through the law – Commons even argued that the state itself “consists in the enforcement by physical sanctions of what private parties might otherwise endeavour to enforce by private violence.”49 Similar themes were evident in other realists. As Morris Cohen noted “ enforcing contracts, the government does not merely allow two individuals to do what they have found pleasant to their eyes. Enforcement, in fact, puts the machinery of the law in the service of one party against the other.”50 Or as John Dawson put it, the doctrine of laissez faire left “individuals and groups [free] to coerce one another, with the power to coerce reinforced by the agencies of the state itself”.51 From this perspective, the liberal dichotomy between state and market was false and the issue was not one of more or less government, or more or less interference in the economy, but rather a political question of “how the ubiquitous authority of government is to be exercised within the economic system: who is to be exposed to the coercion of whom, and to what extent52.

These theorists thus challenged the classical liberal conception that private power was separate from public power. Robert Hale argued that, while the right to property is a negative right against the state for the property-holder, it is not only a negative right against forcible dispossession; it is also a positive right that uses the coercion of the state to protect the property-holder against any non-property holder that might need or wish to use the property. 53 For those who are non-owners of property this is extremely coercive, as if the non-owner has no land on which to produce food, the law “coerces him into wage-work under penalty of starvation”, regardless of the type of wagework or the coerciveness and unfairness of the demands of any particular employer – the worker is hardly ‘free’ not to work in the industrial age. More heretically, Hale even suggested that state power might be used to reduce private coercion to create greater ‘freedom’ for the powerless:54

“.. by judicious legal limitation on the bargaining power of the economically and legally stronger, it is conceivable that the economically weak would acquire greater freedom of contract than they now have--freedom to resist more effectively the bargaining power of the strong, and to obtain better terms.”55

These theorists argued the classical assumption that the major threat to the right of the individual was the state, was outdated in an era when private economic power had become concentrated in the hands of so few. The realists challenged empty notions of formal equality in the context of economic power. Writing on Adair v. United States (1908) in which the Supreme Court again relied on the notion of ‘freedom of contract’ to strike down legislation to limit ‘yellow-dog’ contracts (which prohibited workers from joining a union), 56 Roscoe Pound despaired at how the Court could insist on ‘freedom of contract’ and on the essential equality between the massive railroad corporation and individual workers “in the face of practical conditions of inequality?.. Why is the legal conception of the relation of employer and employee so at variance with the common knowledge of mankind?” 57 Writing on Ritchie v. People (1895) when the Supreme Court of Illinois struck down a statute limiting working hours for women and children in factories and workshops (which had been passed to make it unlawful for employers to force employees to work 16 hour days)58, Commons cited an opinion piece of the Chicago Times Herald: “There is a ghastly sort of irony in the attempt of the Supreme Court to explain or excuse its decision upon the plea that it is protecting the rights of the weak individuals with labor to sell”.59

These theorists thus suggested that the notion of formal equality presupposed by the courts completely ignored the manifest inequality between workers and employers. When the courts argued that workers entered freely into the yellow-dog contracts, the court was clearly failing to reflect on the extent to which workers were acting from necessity rather than from choice in the context of massively unequal bargaining power. The realists suggested then that, in their formalistic pretence of protecting the freedom of both sides, the courts’ insistence that the state refrain from interference in cases such as Lochner or Adair, was an obfuscation of their privileging of the rights of the stronger party against the weaker party. Laissez faire principles simply meant leaving the powerless at the mercy of the powerful, and the courts prohibited the state to intervene to assist the powerless.

As Commons argued, the issue was not one of freedom per se, but whose freedom; “that is: freedom for the employers to command employees to work 16 hours per day versus freedom for the employees from injurious commands of their employers.”60 In such decisions, the courts were making a political choice between competing interests and conceptions of liberty. As John Dawson noted, there was a choice between a “freedom of the ‘market’ from external regulation” or the freedom of individuals achieved through “regulating the pressures that restricted individual choice” through concepts such as duress.61 In other words, the choice is between privileging the ‘economic freedom of corporations’ to be free from regulation, or privileging the ‘economic freedom of individuals’ to be free from coercive corporate power.

For the legal realists, the relevant question was not whether or not there was regulation (as clearly the enforcement of property and contract constituted regulation, just as much as any limitations on those rights would constitute regulation). The relevant question was rather whose interests and rights were being protected and what distribution of power was being enforced. These theorists challenged laissez faire by focusing on economic power and economic inequality, in a way that began to conceive of the possibility of protecting individuals against corporate power, using state power to secure freedom of individuals from coercive market power rather than freedom of corporations from the state. It was not the market itself, or the corporations, that were in need of protection from the state, it was the workers and ordinary people who needed protection from market power. Thus rather than it being the duty of the state to protect the laissez faire workings of the inexorable, economic ‘laws of nature’, it should be the duty of the state to use its countervailing power to protect the weak and powerless against that economic power.62 The liberal duty to refrain from interference in the market economy was a myth, as the state was already systematically intervening in the economy; what was important was the duty to change the ‘working rules’ of the economy. This began then to shift notions of state responsibilities and to open up new ways for new thinking about rights.

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