The United States Constitution

Our Most Valuable Economic Asset

Since yesterday, I have been thinking about how timing makes a difference in the content of my economics classes. During an election year, both comedians and economics instructors benefit from a wealth of material, which is hard to pass up. Combine this was an economy on the edge of recession, and negative material flows into the classroom in great quantities. However, my concern is that I may have left you with an overly pessimistic view of the future. It was Thomas Carlyle (1795-1881) who first labeled economics “the dismal science.” I hope that as you leave this class, this label does not stick with you as you think about economics. The truth is that you are a part of the most successful economic experiment in human history. We live in a country where most of the poor have a roof over their heads, access to heat, running water, transportation, electricity, telephones, the Internet and where even the poor often battle the bulge, rather than starvation. Things are not perfect, but if we are honest, we have to concede that things could be much, much worse.

During the hot summer of 1787, a group of men met in Philadelphia to hammer out a new system of government. After months of meeting in a hot room with the doors locked and the windows covered to insulate the delegates from political pressures, they compromised on a new Constitution for the new United States of America. The principles imbedded in the Constitution are our most valuable economic asset.

These men started their work on a foundation of the English Common Law. Inherent in the Common Law tradition are the concepts of the rule of law, limited government and strong property rights. These are the bedrock of a free economic system. During the Constitution’s ratification process, the new country also agreed to include ten amendments, which are known as the Bill of Rights. These first ten amendments also include several basic principles important to our economic success, including freedom of speech and of the press, as well as additional explicit guarantees of limited government, due process of law, property rights and an express guarantee of federalism.

By the rule of law, we mean that the law applies to all. Whether you are a President, Senator or a janitor, the law is to apply to all equally. This concept began with the Magna Carta. In the 13th Century, England had an inept King name John. John managed to find a way to upset everyone. He lost English lands in Normandy. He angered the Pope. He enacted all kinds of laws to raise money for the crown to make up the income he lost from the lands he lost to the French. The English Barons had taken enough. They rose up and threatened to depose King John. Finally, at the point of a sword, they forced King John to sign an agreement limiting the power of the king and subjecting the king to the rule of law. Government control and preferential legal treatment for the elites of a society undermines a free market system. Throughout most of human history, government power has been used as a mechanism for maintaining the power of those at the top and rewarding them with special economic treatment, largely at the expense of the majority of the population. The Magna Carta began the process of undermining the use of government as a mechanism to perpetuate the power of those at the top.

The Constitution requires that the same rules apply to all. It also divides and checks power so that no one person or group can dominate government. The first three Articles of the Constitution set up three separate branches of government with distinct responsibilities and with each branch having check against the abuse of power by the other branches. This limitation of power and insistence on universal rules allows room for freedom in society, including the freedom to start and run a business without those in power moving in to seize the spoils.

Power is also limited by the division of authority between the Federal government and the states. All powers not granted to the Federal government by the Constitution are powers left to state governments. Each state government is also divided into three branches, thus enforcing a system of checks and balances on state power, as well.

In addition, property rights strengthen and protect private initiative in a free market. Property rights grant individuals and companies control over their assets and protect them against undue interference by government and by others, who may be in a stronger position. Ownership of a home, business, bank account, shares or stock, patent or any other asset means that you have control over that asset and that it cannot be arbitrarily taken from you. If you are to be deprived of your property, it must be done in accordance with the law and you must be afforded your due process right, including the right to receive notice of the action, and the right to defend yourself in a court of law.

Freedom of expression is also critical to the functioning of a free market. Markets run on information. In fact, a market is considered to be efficient when it is capable of incorporating information rapidly into the price of assets traded in that market. Consider the role of information when you want to buy a car. The freedom that people have to advertise is important to your ability to know where you can find the type of automobile you wish to purchase. If you are buying a new car, you ability to go on the internet and obtain information like the sales price from the manufacturer to the dealer helps to protect you as the consumer from manipulation by the dealer. It forces the seller to be more competitive and more honest in his approach to selling vehicles.

It is no coincidence that our Constitution was written at a point in time, when the idea of free markets was very much on the minds of the leading thinkers of the day. After all, Adam Smith published his best seller, The Wealth of Nations, in 1776. Smith not only argued that a free market would produce more wealth, but he argued that a free market was a “system of liberty” which would allow people an extraordinary degree of individual freedom, but without the chaos that most people feared would result without strong government control over people’s lives. By the summer of 1787, the American founders were very familiar with the ideas of Adam Smith, and these ideas became a part of our system.

Starting with the French Revolution in the 1790s new economic ideas began to form. Chief among these ideas was the concept that “equality” meant economic equality (http://markbarnes.us/blog%206-9-07.htm ) and that property was simply a mechanism to steal from the working class ( http://markbarnes.us/blog%202-5-07.htm ). These ideas were further developed by Karl Marx in the mid-1800s and culminated in the Communist Revolution in Russia in 1917. During the 1930s and later, while most of the world to one degree or another fell prey to these ideas, our Constitution acted as a brake against the wholesale acceptance of these ideas, which turned out to be so destructive to much of the world. (http://markbarnes.us/blog%209-10-05.htm )

As you leave this class, I hope that there are lessons you take from here about the economic problems that we currently face. When inflation threatens and unemployment increases, there is reason to be concerned. It is always important that we try to make things better. But, I also hope that you remember how very fortunate we are to live in the United States of America and that our most valuable economic assets is the document hammered out in Philadelphia 221 years ago, the Constitution of the United States of America.