How much economic freedom is a good thing?
This book tells the story of how the business community, and the trade associations and think tanks that it created, launched three powerful assaults during the last quarter of the twentieth century on the federal regulatory system and the state civil justice system to accomplish a revival of the laissez faire political economy that dominated Gilded Age America. Although the consequences of these assaults became painfully apparent in a confluence of crises during the early twenty-first century, the patch-and-repair fixes that Congress and the Obama administration put into place did little to change the underlying laissez faire ideology and practice that continues to dominate the American political economy. In anticipation of the next confluence of crises, Thomas McGarity offers suggestions for more comprehensive governmental protections for consumers, workers, and the environment.
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About the Author
Thomas O. McGarity holds the Joe R. and Teresa Lozano Long Endowed Chair in Administrative Law at the University of Texas at Austin School of Law. He is the author of The Preemption War: When Federal Bureaucracies Trump Local Juries and Reinventing Rationality: The Role of Regulatory Analysis in the Federal Bureaucracy. He lives in Austin, TX.
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Freedom to HarmThe Lasting Legacy of the Laissez Faire Revival
By Thomas O. McGarity
Yale UNIVERSITY PRESSCopyright © 2013 Thomas O. McGarity
All right reserved.
Chapter OneThe Laissez Faire Benchmark
The American economy of the antebellum years was dominated by farmers, traders, and small shops and factories owned by single proprietors or a few partners. The corporate form was reserved for financing large-scale public projects (roads, dams, canals, and the like) operating under state-issued charters that subjected the underlying business entities to extensive oversight and control. Under the forceful prodding of advocates for economic growth, however, state legislatures in the years leading up to the Civil War began to enact general incorporation statutes that permitted private business entities to incorporate under charters drafted by their lawyers and approved by state agencies. Because it allowed a single company to draw on the resources of thousands of investors, this new legal entity swept the nation in the postwar years.
The emergence of the corporate form blended nicely with the laissez faire ideology of an expanding class of economic elites in the growing industrial economy. For the laissez faire gurus of the Gilded Age, the ultimate repository of virtue was the marketplace. Social Darwinism's assurance of the "survival of the fittest" provided a "scientific" underpinning for the values of hard work and self-reliance, while providing an objective rationale for public policies that tolerated large disparities in wealth. As state and local Chambers of Commerce promoted laissez faire ideology as the only respectable civic virtue, free market values were championed in media, the classrooms, and the churches.
The laissez faire ideology that dominated the Gilded Age, referred to in this book as "laissez faire minimalism," featured four fundamental tenets. The firstensuring economic libertyshielded consensual private economic arrangements from governmental interference except for very limited purposes like protecting individuals and their property from force and fraud. The second tenetprotecting private propertywas necessary to maintain the incentive to accumulate wealth, which was in turn the primary stimulant for effort and innovation. The third tenetenforcing private contractswas critical to a smoothly functioning capitalist economy under which private wealth increased through investment in socially useful goods and services. The fourth tenetensuring industrial peace and economic growthrecognized an affirmative role for the government in stimulating economic activity by sponsoring public works projects, making commonly held resources available for development and exploitation, preventing inflation of the currency, and ensuring that companies could pursue legitimate trade without fear of disruption from striking laborers, picketing boycotters and other disgruntled disturbers of the peace.
For Gilded Age elites who believed that "economic liberty" and "individual liberty" were inextricably linked, the logical next step was to afford corporations the status of "personhood." State courts abandoned the theory that the corporation was a mere legal construct allowed to exist as a "concession" of the state legislature, and the Supreme Court then bestowed on it the constitutional status of personhood without even entertaining legal argument on the matter. The final step in the legal evolution of the corporation was to weave "economic freedom" for corporations into the texture of the Bill of Rights. Since state law permitted corporate persons to hold title to property, they could claim the protections of both the due process clause and the "takings" clause, under which government could not "take" private property for public use without paying just compensation. The Court held that governmental intervention was justified only when an entire industry was "affected with the public interest," and it narrowly construed legislation that met this test to constrict governmental authority.
At the same time, courts expanded traditional land-based notions of "property" to include virtually anything of value in the marketplace, thus rendering suspect any government action that reduced a private entity's profits. Labor was merely a form of property that workers could freely sell to employers, and legislative attempts to regulate the terms and conditions of such contracts (through minimum wage, minimum hour, or child labor laws) unconstitutionally deprived laborers of property without due process of law. That the arrangement was imposed upon an economically weaker party by a powerful corporation wielding the collective resources of its shareholders on a "take it or leave it basis" was irrelevant to the law.
If the courts were inclined to restrain governmental attempts to set high standards of corporate responsibility, they were even more willing to limit corporate accountability by fashioning business-friendly common law rules. First, a manufacturer of a defective product other than food could be held liable to direct consumers and others in the chain of title, but not to third parties who were injured by the product because they lacked "privity of contract." Second, the common law adopted a fault-based "negligence" standard that forced the plaintiff to prove that the risk to others posed by the defendant's conduct outweighed its benefits. Third, the courts adopted an "unholy trinity" of defenses that made it exceedingly difficult for injured workers to receive compensation from their employers for injuries due to unreasonably dangerous workplace conditions. The doctrine of contributory negligence precluded recovery by a worker whose own negligence contributed in the slightest to the injury; the fellow servant rule precluded recovery if another worker's negligence caused the injury, even if the employer was negligent in supervising the workers; and the assumption of the risk defense allowed employers to argue that the employee should not recover because he accepted the job with full knowledge of the risks involved. Fourth, to reduce the threat of ruinous liability to fledgling industries, the courts also restricted the scope of compensable damage to the clearly proven economic consequences of obvious physical injury.
With economic power came political power as the industrialists and bankers behind the largest corporations were able to determine the makeup of many state legislatures, state courts, and to some degree even Congress. Corporate entities had the power to "bend laws and regulations to [their] own purposes," but that power was incomplete. Crises caused by abuses of corporate power could stimulate state legislatures and Congress into action. Nearly every state created a commission to regulate railroad rates and shipping practices, and about half of the states enacted antitrust legislation and/or created agencies to regulate banks and insurance companies. Twenty-five states enacted pure food and drug laws, and twenty-one states created agencies to conduct workplace inspections to protect worker health and safety.
Laissez faire minimalism yielded undeniable benefits for society. By almost every conceivable measure, the United States economy grew during the last quarter of the nineteenth century. The unconstrained growth, however, came at a terrible social cost as the large corporations that dominated the economy stubbornly resisted even weak regulatory constraints and avoided being held accountable for much socially destructive behavior. Many of the state laws were only sporadically enforced, and others were declared unconstitutional by state and federal courts.
Because the easy availability of unskilled immigrant labor severely limited the negotiating power of any individual worker, employers determined the rules of the workplace. Most workers labored for ten hours a day six days a week, often in dangerous conditions. Mining companies could demand huge sacrifices from employees, and they easily replaced those who could not bear the strain or were injured or killed in the effort. The Monongah explosion was merely the worst of an ongoing series of major mining disasters that injured or killed thousands of workers. Railroad workers, too, were killed and maimed by the thousands in the push to extend commerce into the nation's interior. By the end of the century, approximately 2,000,000 injuries and 35,000 deaths per year were attributable to job-related accidents. Most of the 4,500 annual railroad grade crossing accidents resulted in fatalities. Flimsy rail construction combined with poor scheduling and increased length, weight, and speed of trains to cause hundreds of devastating derailments.
Companies paid little attention to the adverse environmental consequences of the by-products of mass production. Coal combustion, the primary source of energy for homes, offices, and industrial facilities, generated thousands of tons of particulate emissions that contributed to lung disease and cloaked urban areas in soot. Sulfur dioxide emissions from railroad locomotives, industrial boilers, foundries, and mills often overpowered nearby neighbors. Although most cities paid some attention to municipal garbage and sewage disposal, they rarely regulated activities within the gates of industrial facilities. The modest municipal pollution control ordinances of the day were generally toothless and seldom enforced. When they were enforced, the courts were as likely to set them aside as unconstitutional impediments to interstate commerce as to issue injunctive relief. And common law nuisance lawsuits did not fare much better.
Another important Gilded Age commercial development was the use of advertising for mass marketing of consumer products. Although consumers had been sickened and defrauded by purveyors of adulterated food for centuries, the advent of large-scale advertising and impersonal multi-state markets made massive consumer fraud a commonplace occurrence.
Not everyone approved of the blatant corruption of the marketplace and the political system. An assemblage of Eastern establishment professionals known as Liberal Republicans and later called "Mugwumps" were generally suspicious of the machinations of the large banking and manufacturing concerns of the day. They were, nevertheless, strong proponents of laissez faire, especially at the federal level, and they generally opposed government intervention into "properly conducted" private economic arrangements. Believers in the power of careful deliberation among educated elites, they supported programs for solving social problems that drew upon professional expertise. The populist movement that emerged from the human suffering during the economic depression brought on by a bank failure of 1873 presented a far more serious threat to the Gilded Age laissez faire regime. Like the equally unruly urban labor movement, the populists wanted not just to clean up the government, but to use it proactively to protect farmers from corporate abuse. Despite much commonality of interest, however, the three movements found it difficult to forge an effective political alliance.
The business community forcefully rejected the claims of all three movements and resisted all of their efforts to regulate economic behavior. Railroads successfully opposed state legislation requiring automatic airbrakes and automatic couplers. The American Mining Congress came up with its own standards for mine safety, and it persuaded Congress to establish a mine safety program in the Bureau of Mines to adopt those standards and preempt more stringent state standards. The newspapers of the time were nearly always hostile to both organized labor and organized farmers. With vastly superior resources at its disposal, the business community ultimately prevailed. William Jennings Bryan's stunning defeat at the hands of William McKinley in the 1896 elections, to which the business community contributed unprecedented sums, eliminated the only serious political threat to the lengthy reign of laissez faire minimalism.
Chapter TwoFreedom Reined: The Progressive Era Through the Public Interest Era
During three critical periods of American history, a confluence of crises revealed the consequences of unconstrained economic freedom in vivid tragedies that were too stark to ignore. At these junctures, the terms of the social bargain were readjusted to reflect a more protective balance among the values of freedom, responsibility, and accountability. During the Progressive Era of the early twentieth century, the New Deal Era of the 1930s, and the Public Interest Era of the late 1960s and early 1970s, Congress enacted bold legislation designed to bring about fundamental change in the relationship between the business community and its consumers, workers, neighbors, and environment. During each of these periods of large-scale crisis and reform, the business community adopted a strategy of "diversion and delay," but to little avail as Congress enacted powerful new laws and created new implementing institutions to provide a more protective governmental infrastructure.
With each wave of protective legislation, the newly empowered agencies initially wrote stringent rules and held private sector actors accountable for violating them. As the crises faded from public attention, however, the agencies settled into routines, and the regulated companies challenged the rules in court, demanded exemptions and variances, and pressed the envelope of compliance. Corporate targets of personal injury, nuisance, and consumer fraud claims adopted scorched earth strategies designed to force plaintiffs' attorneys to spend so much time and money on the litigation that their contingency fees were unlikely to cover their costs. The business community gradually freed itself of many of the restraints until the next confluence of crises yielded public demands for more comprehensive change, and the cycle of reform, reaction, and erosion repeated itself.
THE PROGRESSIVE ERA
As the twentieth century dawned, a growing middle class of shopkeepers, managers, professionals, clergymen, and skilled laborers created a variety of civic associations to demand laws protecting workers, consumers, and the environment from dangerous business practices. An invigorated mainstream press joined in their calls for reform. Unlike their populist predecessors, twentieth-century progressives adopted a "scientific" approach to solving social problems that emphasized expertise over empowerment. Their efforts received a jump start when President William McKinley was assassinated on September 6, 1901, and Theodore Roosevelt assumed the presidency. Although Roosevelt began his political career as a laissez faire minimalist, his views underwent a radical transformation when he witnessed economic freedom in action during a personal tour of New York City tenements. The Progressive Era reached its zenith during the first decade of the twentieth century when a series of crises, beginning with the Monongah disaster and extending through the Triangle Shirtwaist fire of March 25, 1911 (in which gross violations of local safety codes resulted in the deaths of 146 mostly immigrant women), generated public outcries for action that could no longer be ignored.
Although the progressives had many ideas for reforming American business, the legislative output at the federal level was surprisingly thin. The most significant reform came as a congressional response to a crisis of public confidence in the nation's food supply brought on by Upton Sinclair's novel The Jungle and a series of related articles in Ladies Home Journal and Colliers. The Meat Inspection Act of 1906 required a government inspector from the United States Department of Agriculture (USDA) to be on the premises at all times that cattle were being slaughtered and processed in a meat packing plant. The Pure Food and Drug Act of 1906 prevented the sale in interstate commerce of "adulterated" or mislabeled drugs and foods other than meat. Congress assigned implementation responsibilities to the Bureau of Chemistry in the USDA.
Following the Monongah disaster, the coal industry realized that some form of federal legislation was inevitable, and it worked to secure the enactment of a 1910 statute that created a Bureau of Mines in the Department of Interior and authorized it to conduct investigations into the causes and prevention of mining accidents. But the law explicitly declined to grant any power to act on the information it gathered. Congress reacted to the carnage among railroad workers (4,534 job-related deaths and 87,644 injuries in 1907 alone) by creating a new federal cause of action for damages attributable to negligent workplace conditions, and it substituted a comparative negligence regime for the harsh "unholy trinity" of common law defenses that had effectively prevented railway workers from obtaining compensation from their employers during the Gilded Age. After the Triangle Shirtwaist fire, several states enacted rudimentary worker protection laws.
In 1913, President Woodrow Wilson's trusted economic advisor, Louis Brandeis, penned a series of influential articles in Harper's Weekly (later turned into a popular book entitled Other People's Money) in which he recommended strong regulatory constraints on banking institutions. Soon thereafter, Congress enacted the Federal Reserve Act of 1913, which created the Federal Reserve Board (the Fed) and gave it limited powers to regulate the banking industry. Wilson began a long tradition of deference to Wall Street, however, when he appointed J. P. Morgan's chief lieutenant to be the first chairman. With Wilson's strong support, Congress also enacted the Federal Trade Commission Act of 1914, which created the Federal Trade Commission (FTC) and gave it a broad and flexible mandate to issue orders prohibiting "unfair methods of competition" and unlawful restraints on trade.
Excerpted from Freedom to Harm by Thomas O. McGarity Copyright © 2013 by Thomas O. McGarity. Excerpted by permission of Yale UNIVERSITY PRESS. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents
Introduction: Two Tragedies 1
Part 1 The Evolving Social Bargain
1 The Laissez Faire Benchmark 13
2 Freedom Reined: The Progressive Era Through the Public Interest Era 18
3 Freedom, Responsibility, and Accountability 27
Part 2 Preparing for the Laissez Faire Revival
4 The Intellectual and Financial Foundations 35
5 The Idea Infrastructure 41
6 The Influence Infrastructure 57
Part 3 The Laissez Faire Revival
7 The Assaults on Regulation 67
8 Worker Safety 84
9 Environmental Protection 99
10 Drug and Device Safety 118
11 Food Safety 133
12 Transportation Safety 147
13 Financial Protection 164
14 Consumer Protection 183
15 Civil Justice 197
Part 4 Renegotiating the Social Bargain
16 Disabled Government 217
17 Patch-and-Repair 232
18 Striking a New Bargain 264
19 Conclusions 286