Progressivism’s Critique of Free Markets

Richard Epstein, New York University

Ideas Have Consequences

In writing about intellectual and constitutional history, I often refer to a phrase by a University of Chicago social theorist named Richard Weaver, which states, “ideas have consequences.” Unfortunately, there is a corollary to that particular theme, which I think everyone has to remember: bad ideas have bad consequences. What one has to remember in thinking about how political organizations and political theory operate is that they differ radically from science in one particular characteristic. In the sciences we expect an orderly accretion of knowledge such that the next generation builds on what happens with the first; whereas in political science, in political economy and in law there is the constant effort to erode those understandings that have been created, so that you don’t have progression in the sense you would in the sciences. Often times, in fact, there are periods of deep decline following periods of relatively clarity. For example, much of what took place in the Great Depression is evidence of the power of ideas to misshape a society and to inflict harm on many innocent citizens who have no idea of the economic forces arrayed against them.

My job is to explain how this process works from the perspective of a lawyer. Here, I do not want to be too technical about the subject, but to talk first about two conflicting conceptions of government and then the various maneuvers—legal and political and constitutional and interpretive—that allow you to move from one to the other.

The Founding Fathers and the Rule of Law

The first of these theories is essentially one from the Founding Fathers, and it is one to which I largely subscribe. I do not wish to make the argument here that we have a perfect Constitution. I can go through in enormous detail many of the errors that are contained within it, even after you put aside the Fugitive Slave Clause. Even its structural provisions contain deep confusions. But these are details in the grand scheme of things. I think its towering historical success was clearly animated by two propositions. The first was the rule of law, which in its most minimal sense insists that any talk about a legal system must accept that it contains some degree of ultimate coherence. We must therefore believe that this coherence rests upon the ability to articulate rules. That ability to articulate rules in turn depends upon the ability to communicate with sufficient clarity from one person to another, such that the ideas that one person develops can be recorded with sufficient precision so that other individuals are able to apply them. And so essentially, to some extent, this approach accepts the Blackstone tradition that law is found rather than made. The implicit premise of this view is that the durability and permanence of law depends more than we sometimes care to acknowledge on its deep ethical substrate.

Setting up a constitution requires just that kind of faith. The overall mission will founder from birth if its draftsmen think the language is completely malleable such that every time they put down a general proposition its meaning lasts only until some clever lawyer thinks of a way to gut its meaning. Of course, we must have exceptions. But annihilation in the guise of interpretation has to be ruled out of bounds from the outset. So, my plea to judges everywhere is to remember the principle that interpretation is not reenactment of other legislation that is thought better and wiser at the moment.

Interpretation is never easy, but the process always fails if judges believe that it is necessarily doomed from the start. In contrast, those judges and thinkers who understand that interpretation is a difficult enterprise, but try their level best to get it right, are more likely to succeed. If a nation can develop a critical mass of people on the right side of that issue, then it will prosper. If it develops a critical mass on the wrong side of this issue, it will do very badly.

Legal Realism and the Rule of Law

So this constant debate that we have inside universities and so forth about language and about clarity has powerful political implications for the world of daily affairs. In its most simple form, those people who believe that clear rules are possible almost always become defenders of limited government. Those people who think that language is an impossible tool with which to work will always end up believing in a series of arbitrary legislative commands, because there is no constitution to stop them on the one hand, nor any set of eternal or even long-term political truths to guide them on the other. And it is therefore no accident that the leading jurists of the Progressive period did not have any particular affection for Blackstone, who was, in fact, immensely sophisticated on a large number of issues.

Rather, what grows up instead is a strong tradition of “legal realism” which in its most vulgar form seems to say that what a judge decides in the afternoon is a function of what he ate for breakfast. To be sure that is not what the serious realists meant. What their approach did embrace, however, was also dangerous. They had the deep conviction that there are always changes in social circumstances that require a fundamental rethinking of the way in which we as a nation do business, so that nothing about the language of any particular text operates as anything other than a nuisance and an obstacle to one’s preferred political outcome. Start with this world view, and these pesky obstacles are easily overcome by various clever interpretations. The pliability of language becomes essentially a precondition for softening up and for knocking down the old structures that are associated with our original constitutional order. That is the first of the concerns that we have: the battle over interpretation and meaning, and a little later in the talk I’m going to give one or two illustrations as to how this view of language can turn constitutional text on its head.

Private Property versus Collective Control

The second question you have to face is more normative: exactly what kind of order do you want to create? On this point, our original founders did not use freedom of contract as their operative conception. That term was used in the 19th century to describe the development of the capitalist system under the banner of laissez-faire. On the other hand, the founders chose a term which was perfectly consistent with that general market orientation, which was embodied in their strong and consistent respect for the institution of private property. And here, of course, they followed the traditional definition of private property without hesitation. That definition was, modern skeptics to one side, largely unchanged from Roman times, and it provides that with respect to any particular material thing—whether it be a table on one hand or piece of land on the other—the owner held in perpetuity the rights of exclusion, the rights of possession, the rights of use, the rights of development, and the rights of disposition. These were the largest bundles of rights you could give over a particular thing to one person consistent with a like bundle of rights over other things to other individuals. There is no doubt that their attitude was that any legal system had to compromise an absolute system of private property rights to some extent in order to raise the revenues that government needs in order to enforce the proper set of private relationships among its citizens. Therefore, some system of taxation and some system of regulation would surely be appropriate. Interestingly, all the classical liberal writers without exception believed in some form of a proportional or flat tax as the way in which to support public institutions on the grounds that this system allows the government to reach its revenue target on the one hand while reducing the amount of political wobble and intrigue by bureaucrats who were trying to force the burdens of government on their opponents while enriching their friends through public expenditures.

The basic proposition in that earlier system was that government essentially was the umpire, government was the enforcer and definer of rights, and—I will add—that the government had some responsibility for the supply of infrastructure and also some responsibility to control the dealings of firms with monopoly power. The infrastructure and the monopoly issues, which are extremely difficult to resolve, do not come to the fore in American life largely until the end of the Civil War with the rise of industrialization. And so the question then is: What’s wrong with that framework?

The Progressives, of course, had nothing but contempt for the intellectual constructs of the founding period. Louis Brandeis and Felix Frankfurter—just to mention a couple of notables from this era—begin their popular writing by expressing their polite disdain for writers like Adam Smith who championed open markets against various regulatory or mercantilist interventions. The Progressives were always fond of saying that the advent of large corporations and firms in the United States led to a form of industrial serfdom that, while not quite the equivalent of slavery, was close enough to it, so that it becomes the duty of government to balance out the inequalities of fortune between the mighty few and the subservient many.

Now, in doing all this, the Progressives should have then asked this question: What’s the evidence for their world view? John Dewey in writing about this point said we could be sure of the massive forms of economic inefficiency because we no longer observed the age old tradition of having two farmers haggling over the price of a barrel of wheat over their common fence. Instead, they worried that business now works on this take-it-or-leave-it situation which to Dewey was a sign of domination and oppression from by dominant parties.

In order to understand the Progressive mindset, it is very important to isolate their basic misconception, which goes something like this:

If the capitalist economy has led to a consistent downhill spiral, the Progressives said, then government has to intervene in the economy on the side of the little fellow to restore a much needed balance. Also, to the extent that we now have a series of constitutional obstacles—chiefly in the form of protection of private property rights or contract rights on the one hand, and the system of federalism on the other hand—we now know why it is we have to put alter these constraints in order to allow our comprehensive world view to flourish. Our agenda of extensive government regulation cannot possibly succeed in this world if in fact Congress and the states are hampered by all of these archaic conventions that were introduced by people who were silly enough to believe that Adam Smith could in fact foresee the growth and development of the modern economy.

Two Errors of Progressivism

Now, the first thing to ask is why do these ideas have such profound consequences in their own time? The answer is that if we go back and look at the period between 1925 and 1935 to find coherent writers who opposed this particular element, there are almost none. One noticeable exception was W.H. Hutt, a bold Englishman who lived in South Africa. In 1932 Hutt invented the term “consumer sovereignty” as an effort to push against this tide of collectivist thought. But he was a lonely exception. Overwhelmingly the sophisticated American public intellectuals followed the line of people like Dewey and Brandeis and Frankfurt in their diagnosis of the ills of the modern era. American academics were absolutely united with the Progressives in their conviction of the proper cure to what ailed the market.

Size versus Market Power

Yet uncovering error is difficult because it requires a proper diagnosis of the initial errors in the underlying conception, and an awareness of how these ideas—good and bad—get played out with in the framework of our legal system. The first of the common mistakes in the Progressive era was a deep seated confusion between size of firms on the one hand and market structure on the other. Munn v. Illinois (1876) made popular this proposition in American Constitutional law: “Businesses that are affected with the public interest are subject to regulations with respect to maximum charges they can make to the consumers whom they serve.” This phrase “affected with the public interest” was, in fact, not a new term in America; it was a term that came out of the English common law and is found in the work of Sir Matthew Hale writing in the late part of the 17th century. The term is explicitly incorporated into the whole system of rate regulation with respect to certain limited state monopoly industries in Allnutt v. Inglis, which was decided by Lord Ellenborough in 1810. And the classic formulation of this doctrine held that to the extent that we create a monopoly (and the law was very clear that it did not matter whether that monopoly be created by grant of the crown or by a series of powerful, not easily displaced natural circumstances) it is appropriate to limit the rates charged in the attempt to force the monopolist to charge competitive rates. In fact in Allnutt, this task was actually a relatively easily realized program because it only required seeing the prices charged at certain storage facilities (which were used to hold duty-free goods for reshipping out of England) that did not receive a state monopoly. This idea of maximum rates gets carried over in Munn under ambiguous circumstances. Illinois imposed the rate regulation, when it was not sure whether the monopoly over grain storage facilities existed—although in retrospect it appears that it did. To fudge the question, the Court called the economic situation on the ground a “virtual” monopoly, a phrase which nobody quite understood then or now.

There is ambiguity in the doctrines, but the basic intuition of the early English cases boils down to this proposition: rate regulation, if it’s proper at all, is only proper in those circumstances where it operates as a correlative to monopoly power. Clearly that is the correct result insofar as rate regulation only makes sense in response to monopoly power, although even there the game may not be worth the candle. But the negative implication is much more powerful. The one sacred proposition above all others is as follows: don’t experiment with rate and wage controls for firms that operate in competitive markets. As it turns out, most markets are happily competitive, so that the negative side of the proposition is at least as important as the affirmative.

What the Progressives assumed falsely was that size had the same effects as monopoly power. Once they bought into that proposition, they concluded that it was perfectly acceptable to regulate the rates of all insurance company policies, even if there are 500 firms in the industry. Their reason was the large difference in net worth between the ordinary consumer and the typical firm. But as we all know, small consumers regale in playing off MasterCard, American Express, or Visa against each other, or other specialty comers that are looking for niche markets. The key feature in these dynamics is not the size of the company on the other side of the transaction; it’s the number of choices that consumers have, which is what a competitive market is all about. The antidote to size is not the Progressive one. Rather, it’s the exact opposite: what we strive for is to secure free entry to the market place so that the rate regulation problem will be obviated.

And entry matters. Then and now, every time there’s an introduction of a new technology, what looked to be a monopoly in the former age ceases to be one in the subsequent age. Encouraging entry thus reduces the pressure on rate regulation and increases consumer choices. There is not a single thinker in the Progressive era that made this proposition the centerpiece of his thought. So that’s their first mistake—to assume that the government regulates everybody of any size as though they are monopolists.

Transaction Costs versus Transactions

The second mistake of the Progressives lies in their glorification of transactions costs over successful transactions. I have the following fantasy of how to wreak vengeance on Louis Brandeis. I want him to go into Wal-Mart, and I want him to be the tenth person in line. I want the store to adopt the policy in which they will bargain over the rates of the item that is put into the market basket for the nine customers ahead of him. And so, this scenario unfolds: as each customer comes up, the discussion begins: “Well, the listed price is $49.95. Will you take $48?” “No, we won’t.” And you sit there and watch him twitch and stew as each person before him haggles over these prices. I want him to rejoice in the virtues of take-it-or-leave-it transactions.

Brandeis and his Progressive thinkers are what we would call the ultimate anti-Coaseans—named after my friend and colleague Ronald Coase. Their central error is to believe that the sign of an efficient market is high transactions cost, when in fact it is exactly the opposite. This is the key question in all mass markets: how it is that parties increase the velocity of transactions per unit of transaction cost? The more merchants (who take the lead on these matters) move that ratio in favor of a high volume of transactions, the better the operation of the firm, and hence the market. In competitive conditions, the last thing an independent observer expects to see is haggling, because now he has ample reason to have confidence that a unique price will emerge, because of this fundamental theorem: in a competitive market if a firm raises its price, it loses all its customers; if it lowers its price, it can’t make a profit—so there’s a unique equilibrium price. That point is not exactly true in real markets, because there are always minor forms of perturbation that leave a little wiggle room. But essentially, a take-it-or-leave-it market, which the Progressives thought to be the sign of market malaise, is in fact the sign of enormous health.

This analysis then leads to the following historical inquiry: were the Progressives independent thinkers on these key issues? Or were they in effect commandeered by various interest groups? I’m sorry to say that in my view the people who actually understood how markets worked were the chief beneficiaries of the Progressive movement. Behind all their communitarian rhetoric, the interest groups knew exactly what the appropriate function of government for them was—it was to secure the monopolies in their chosen field of business, by excluding competitors and by organizing their own fractious rank and file.

The Legal Setting

The Commerce Clause

Let me now give you some sense of the obstacles that these interest groups had to overcome. Two stand out. First, the interest group had to keep out new rivals. Second, it had to apportion the gains to garner support amongst its members. The first of these issues ties in neatly with the scope of the federal power under the Commerce Clause. The success of monopolies depends on a massive misconstruction of the following grant of federal power: “Congress shall have the power to regulate commerce with foreign nations, among the several states and with the Indian tribes.” As drafted, the word “commerce” had its standard 18th century definition as trade or exchange amongst individuals, including shipping goods back and forth across state boundary lines. So a boat trip that starts in New York and goes to New Jersey, or goods that are shipped from New York to New Jersey, or passengers that go between states—there are all examples of commerce amongst the several states.

Now try to figure out how to organize a cartel. If, in fact, the notion of commerce amongst the several states does not give the power to the federal government to regulate commerce within any particular state or to regulate manufacturing, agriculture or mining or any of the productive activities that proceed commerce (that is, activities that occur before you goods are shipped across state lines) or follow commerce (that is, activities that occur after these goods have been shipped across state lines for use in the state of their final destination).

The question is how this definition allows the federal government to implement one of the truly bad ideas at the end of the 19th and start of the 20th century, namely, the rise of the notion of parity in the prices of farm goods. The agricultural campaign that emerged demanded that the price of agricultural goods in the United States be fixed at a permanent level measured by the peak years of farm prices in the five years or so just prior to the start of World War I. And so this uncompromising notion of price rigidity asked everyone other than farmers to bear the brunt of a downward turn in demand. Well, how do you get to that objective? The first legislation of note is Section 6 of the 1915 Clayton Act, which says that the antitrust laws—which applied to large industrial combines under the Sherman Act—have no application whatsoever to either agricultural cooperatives or to labor unions. What happens at the ground level—this sort of misguided argumentation of people like Brandeis and Frankfurter—is now harnessed by powerful organizations whose political pop gets them immunity from the antitrust laws. Now the Progressives can pass a statute without worrying about the limits of Congressional power. All that they have to do is to neutralize federal enforcement over the domain in which that power could be exerted.

Nonetheless, the antitrust exemption, which solves the problem of coordination for cartel members, does not solve the problem of exclusion. To solve this second problem the agricultural interest groups needed stronger medicine, and they found it. The famous 1942 case of Wickard v. Filburn was the last of a series of cases that achieved that objective. That allotment system had been the result of a popular referendum among farms which ordered a cut back in the amount of wheat produced in order to keep prices highs. Filburn used that excess grain to feed his own farm animals. After solemn deliberation, Justice Jackson, writing for the entire Supreme Court, made this judgment: if Mr. Roscoe Filburn takes the wheat that he grows on his farm and feeds it to his cows, he has engaged in interstate commerce. Therefore, Mr. Filburn is subject to regulation under the federal government, which allows them to fine and punish him for planting wheat in excess of a permissible quota—a pure output restriction of the sort that would never pass muster under the antitrust law, if it applied. Yet before anyone laughs, they must understand two points: that proposition lies at the heart of federal power in every single area of activity today, and ninety percent of the legal profession will defend this interpretation as an accurate rendition of the Commerce Clause, so powerful is the Progressive legacy. Yet why do we wish to expand the scope of Commerce power to enable the United States government to organize agricultural cartels?

How is it that the Supreme Court got to this peculiar position in the first place? Well, in earlier years the court constantly tried to figure out how to regulate production in both labor markets and agricultural markets. State regulation won’t do it because of the competition that can take place between states. Therefore if the federal power is limited to the ability to control the movement of goods across state lines, then markets will outwit government. It is not that the federal government did not try to use transportation as a lever to control production. But earlier maneuvers had failed. Most notably in a 1918 case called Hammer v. Dagenhart, the Congress hit upon an extremely ingenious idea—so savagely clever that few of us could think of it on our own. The topic was child labor. The device which Progressive thinkers came up with was one which said as follows:

If you, oh firm, wish to ship your goods into interstate commerce, that’s something that we can regulate and regulation includes the power to prohibit any and all shipment. And you know what? We’re going to prohibit you from sending any goods into interstate commerce if those goods are made with child labor. But wait, we’re much cleverer than that. It’s not just the goods that you made with child labor that can’t move in interstate commerce; it’s also any goods that you make, even if you wish to use sell them in local commerce. Indeed, it’s not merely any goods that you make, oh firm, it’s those that you or any affiliated corporation happened to make. So here is our bottom line: if you want to ship one dollop of goods into interstate commerce, you have to accept direct federal regulation of the internal operation of your plants, one and all.

The particular case dealt with child labor laws, but the strategy could apply to any substantive regulation that seeks to leverage federal control over interstate commerce to federal control over manufacture, mining or agriculture. The bottom line, if this strategy works, is that the federal government has now—by this very clever device of taking control of the bottleneck by asserting its monopoly power—essentially overridden independent state regulatory power that everyone at the time recognized could be asserted over child labor. Imagine yourself as the owner of a firm with the following choice:

I am in North Carolina, I use child labor and as a result I manage to save about $10,000 a year in labor costs. Does this $10,000 outweigh the cost of not being able to ship goods outside of North Carolina?

North Carolina is a good example because that’s the state from which the judicial challenge came to the federal law. And, of course, for firms in the textiles market, 95 percent of their sales were overseas or in some other state, so they had to trade off the hypothetical $10,000 they saved by using child labor against the $100,000 or more that they lost from forfeiting access to the interstate markets. Virtually every firm, without question, would abjectly surrender if faced with that choice.

Why does the federal government want this? The argument for the government from a then young John W. Davis, goes roughly as follows:

Members of the Court, you know that there is—to use modern terms—a prisoner’s dilemma game being played under your noses. If the state of North Carolina decides to raise the minimum age under its child labor laws to 14 years, it’s going to lose the business to another state which keeps its minimum age at 12, so the only way we can stop this constant competition between states is to adopt a uniform national standard.

John W. Davis sees competition in state regulation as what is often called “a race to the bottom” because he’s imbued the spirit of the Progressive era. Most of us would, I think, treat competition amongst states as a race to the top rather than to the bottom, precisely because the exit right operates as a silent and persistent limitation on abuse at the state level.

But remember, the forces urging cartels remain extremely strong. In the New Deal period, all the old court Justices were essentially gone and the new court advocates started to come in. And the modernists have a very different worldview; they can’t understand why anyone would like to see competitions among jurisdictions that tend to reduce the size of government, which ipso facto, is a bad. So they have to roll up their sleeves to undo Hammer, which in due course they did.

So let us now return to our example of the grain, which had resulted in the Wickard decision. That decision is best understood as the end of a judicial strategy that was intended in the New Deal period to allow the federal government to keep the price of grain essentially at $1.16 a bushel in the domestic market when the world price was around 40 cents. Now, this is almost a three-to-one differential that is not sustainable solely through voluntary means, because the first rule of a cartel management recognizes that those people who eagerly sign on the first day are prepared to cheat on matters of price on the second day. Why should anyone sell 100 bushels of wheat for $1.16 if you could sell 200 bushels at $1.00? Yet this is a game that all can play so that without external restraint, cheaters will proliferate until they bid themselves right down to the competitive price, which could (depending on import restrictions) fall to $0.40. So to the New Dealers, the constitutional project was to figure out how to impose direct and comprehensive federal regulation over agricultural markets, because the earlier exemption from the antitrust laws could not do the job alone; you had to have some additional pop to the system.

The first legal maneuver for the Progressives now was to treat the category of commerce (i.e. sales) within the state as an empty category. So in a case called United States v. Wrightwood Dairy, which was decided the same year as Wickard v. Filburn, the Court sustained a federal regulation of the dairy industry with just that effect. Note that this regulation was needed to force private producers who would otherwise sell their dairy products efficiently across state borders to adopt their second-best strategy of selling at higher cost within the same state. The approach is of course less efficient than sales in an unregulated market, but if you have to play the hand you are dealt, then if the federal government blocks interstate sales, you will sell local.

Well, the Progressives were not deterred. Since these local sales interrupted the effectiveness of the national cartel, they insisted that all local sales fell within the power of Congress to regulate commerce among the states because of the way that these local sales undermined the federal efforts to prop up the nationwide cartel. Textually it turns out that the old class of commerce within a given state is now empty, at least for constitutional purposes. So next time someone buys a strawberry at the local fruit stand, they should understand that they have engaged in interstate or even global transaction.

At this point, what do firms do to cheat on the cartel? They vertically integrate. Since they cannot sell to anybody else, they buy their customers. Now the winning strategy is to take grain from the company farm and feed it to cows owned by the same company. Since there’s no market transaction, they can make these internal transfers at a price which is in effect far below the cartel price. And it was precisely for that reason that the Supreme Court said that the government could now regulate the home consumption of grain in Wickard. Start from the Court’s skewed perspective and Wickard is not some technical sport. It is a sheer institutional necessity.

The Interpretivist Mindset, Again

Now, how does a Court persuade itself that this mode of interpretation is intellectually respectable? Well, you go back to the theme with which I opened this lecture, about how language works under stress. Now that you can embrace the realist tradition the following approach is there for the asking:

Circumstances in the economy have changed so vastly that original understandings about commerce that existed in 1787 cannot possibly explain and inform the way in which the world works today. What we now come to understand is that everything in our integrated economy necessarily affects everything. So if we are to have “effective regulation” of interstate commerce then we must regulate all transactions that impinge upon it, and reject such outmoded decisions such as Hammer v. Dagenhart, which were championed by Justices who did not share our expansive vision of the proper rule of the government.

Do not buy this fashionable argument. If there is any problem associated with a change of circumstances that leads to national integration, you have to know what that problem is. Here it is not sufficient to say that the Constitution has to adapt because the form of the federal power already allows for that adaptation to take place. Remember that the Constitution says that Congress has the power to regulate commerce amongst the several states. It does not say Congress has the power to regulate commerce amongst the several states if done by canal boat or by horse-and-buggy. It says any mode of transportation by implication will fall within that power. So interstate telecommunications, interstate railroads and interstate jet planes are subject to federal regulation under sane interpretation of the Commerce Clause: Whatever power Congress had (and has) over the canal boats, the horse-and-buggy or the stagecoach, it also has over steamships, automobiles and railroads even though these things were not invented at the time of the founding. So the conscientious interpreter of older text must always remember that traditional modes of interpretation have a certain degree of generative capacity to take into account changed circumstances.

The second point is, in fact, a more structural and important one. I think it’s fair to say—although not entirely true—that the emergence of network industries as a fundamental category during the industrial age does require some special attention. Of course, there were few interstate canals and some inns here and there, but it was only after the Civil War that railroads started to mushroom into huge businesses, and telegraphs and other communication networks also started to become extremely large. In addition to these changes at the interstate level, we developed power and electricity that are distributed through what were thought at the time to be natural monopolies. And the great concern was that once these network industries work across state boundary lines, any given state could use its local power over its particular portion of the network to snip that integrated network in a thousand places. The United States would essentially replicate the situation on the Rhine River before the Treaty of Westphalia. So long as little bits are each controlled by separate petty principalities, then the cumulative impact of their various regulations and taxes will render useless a natural waterway. Or to put it another way: in dealing with network industries, the danger is the more people have to combine for the network, the more likelihood it is that one of them will block its operation. So networks present exactly the opposite dynamic that is found with competitive industries, where the more competitors in the market, the more likely that the system will get to the social optimum.

So extensive networks do present a special problem. Yet sure enough, the Commerce Clause gives the Congress the tools to deal with that problem, without the kind of interpretive high-jinx that animated Wrightwood Dairy and Wickard. Thus the Constitution—to put the point in somewhat more modern terms—allows federal regulation to ensure that an interstate network would not be snipped to bits by various kinds of state activity, even at the cost of creating the risk of a national monopoly. The underlying decision was that the complete disruption of the network by state regulation is a much more disastrous consequence than national regulation, despite its monopolistic tendencies.

This last observation would naturally segue into the second half of our equation, which asks what system of protections could be afforded to regulated industries which face the constant risk of confiscation by low rates. That proper level of protection is not easy to determine. Unfortunately, the intellectual champions of the Progressive Era directed their intellectual fire in exactly the wrong direction. Far from asking how to establish the proper maximum prices for monopolies, the Progressives allowed the state to place minimum prices on products (especially dairy products) sold in competitive markets. These minimum price regulations were challenged on constitutional grounds in the 1934 case of Nebbia v. New York, which imposed minimum prices on the sale of milk in a fiercely competitive industry. The Progressive’s dominant trope was one of ruinous competition, which to them was measured by the exit of any firm from the dairy business. So New York State put a minimum price regulation of 9 cents per quart of milk, which had the unfortunate effect of cutting out nutrition at a time when every calorie counted. What was Nebbia’s crime? (Remember, Nebbia against New York signals a criminal prosecution.) Answer: Selling the two quarts of milk at the regulation price and then throwing in a free loaf of bread. If you attribute some portion the total price to the bread, then the milk was being sold at below the allowable price.

Justice Owen Roberts, a Hoover appointee, noted that the dairy business was very complicated, and then by his weak analysis demonstrated the limits of his understanding. Precisely because you do not admit to understanding how these regulations create an industry-wide cartel, you let the price regulations pass constitutional muster on the grounds that price regulation in any direction of any industry is just fine whether it regulates monopoly or frustrates competition. And this point reveals the enduring legacy of the Progressive Era. Behind all the communitarian rhetoric lies a constant pattern that holds with respect to every major piece of Progressive legislation that was challenged constitutionally: to my knowledge (there may be some odd exception somewhere) each and every one of these regulations in its own way is designed to prop up state monopolies and to frustrate competition. No legislature could adopt that stance at random.

So the tragedy is that the high-minded intellectuals—the Frankfurters, the Deweys, and the Brandeis thinkers—who misunderstood the basics of modern economic life, and thus did the bidding of labor and agricultural cartels that knew exactly what they’re doing. It is a tragic situation when such well-intentioned individuals become the dupes of the most parochial of interests. So once again, remember that bad ideas have bad consequences, and that only sound thinking will prevent the judges (and legislature) from repeating the worst errors of the past.