The Online Library of Liberty

A project of Liberty Fund, Inc.

• Editorial Staff
• Associate Editors
• Editorial
• Bibliographical Essay: Pamela J. Brown, Constitution Or Competition? Alternative Views On Monetary Reform
• I: Economics & Political Economy
• Mises On Money & Inflation
• British Free Banking & Monetary Theory
• Smith As a Monetary Economist
• Monetarism & Economic Ideology
• Political Economy & Economic Science
• Political Economy, Politics, & Paradigm Shifts
• Schumpeter and Papal Social Theory
• Political Economy & Geology
• The Economic Theory of Property Rights
• II: Law & Philosophy
• Individual Rights Vs. Utilitarian Consequences
• Shifts In the Meaning of Property
• Balzac On Natural Law Vs. Corrupt Law
• Aquinas and Natural Rights
• Man's End, Society & State In Aquinas
• Natural Law & Professor Finnis' Book
• Professor Finnis Replies
• 19th-century Tort Law & Industry
• The Letter and the Spirit of Contract Law
• The Limited Liability Corporation
• Corporations & Transaction Costs
• Corporation Law & the Progressive Era
• The Bureau of Investigation: Political Spying
• The First Amendment: 1918–1928
• III: Social Theory
• Locke, ‘property’ & Natural Rights
• Harrington Vs. Hobbes On Politics
• Jeffersonian Optimism Vs. Country Pessimism
• Rival Notions of Republicanism
• Charles A. Beard: Power Vs. Authority
• Marxist Historiography & the French Revolution
• Mill On Class and Ideology
• Mill On a Principled Political Party
• Tocqueville: On Prisons & Modern Despotism
• Harriet Martineau's Social Thought

II

Law & Philosophy

Because of its practical and theoretical significance, the theme of Law and Philosophy has repeatedly found expression in sets of summaries within the pages of Literature of Liberty (see, most recently, in the Spring 1982 issue, “Legal Philosophy & Norms,” pp. 43–50, and in the Summer 1982 issue, “Law, Politics, and Freedom.”)

Legal doctrines and legal philosophy crucially determine the possibility of a decent and humane society. Thus, Rosenfeld's opening summary dramatizes the contrasting effects of a legal code implementing individual rights or utilitarian, “social good” consequentialism. Likewise Vandevelde's following summary underlines how evolving legal definitions of property can lead to either peace and prosperity or controversy and economic decline.

Other themes surveyed are the meaning of natural law in terms of legal standards (see Carbonneau together with Donnelly, Scully, Veatch, and Finnis), the economic ramifications of tort law history (Schwartz), the debate in common law over strict or broad interpretation of contracts (Trakman), the legal and economic significance of corporate legislation (Amsler-Bartlett-Bolton, Williamson, and Urofsky). Finally, David Williams' article surveys the history and problematic legal status of political surveillance, and Robert M. Cover deals with the parallel issue of illegal government attacks on the First Amendment right of political dissent and civil liberties in America during the “Red Scare.”

Individual Rights vs. Utilitarian Consequences

M. Rosenfeld

“Between Rights and Consequences: A Philosophical Inquiry into the Foundations of Legal Ethics in the Changing World of Securities Regulation.” George Washington Law Review 49 (March 1981): 462–538.

The once sacred citadel of American individualism has become increasingly undermined by an endless proliferation of bureaucratic regulation. At the very same time, the modern attorney, especially the corporate attorney, finds himself immersed in a rising tide of conflict and confrontation. According to Prof. Rosenfeld, these two developments are not unrelated. The individual's loss of power entails a corresponding constriction of the latitude enjoyed by his legal representative. Rosenfeld seeks to demonstrate that the nexus between the fate of the individual and the role of the attorney is much stronger than one of mere correspondence. It proves rather to be one of interdependence and mutual determination.

Individualism in the West has tended to move back and forth on a continuum bounded by two poles: the theory of rights and utilitarian consequentialism. Essentially, the first point of view, exemplified by John Locke and Adam Smith, postulates a whole range of rights which allow the individual to pursue his self-interest with as few fetters as possible. These rights are to be protected whatever the moral consequences in particular cases, since, according to the theory, rights have primacy over morality—although people's pursuit of self-interest will normally, even necessarily, lead to the common good.

Consequentialism, in its broadest sense, holds that the moral value of an act must be determined from its consequences. A characteristic attitude of utilitarianism, consequentialism rejects the proposition that the mere pursuit of individual self-interest necessarily leads to the common good. Bentham and his followers adhered to a “combination of laissez-faire economics with a reiterated demand for political reform.” The heirs of Adam Smith in the economic sphere, they demanded “a harmonization of interests” through legislation in the political and social spheres, thus departing from the minimal state model of Smith and Locke.

This gap between politics and economics was not closed until J.S. Mill made his fundamental “discovery” that the “true province of economic law [is] production and not distribution.” Mill thus freed the social distribution of economic goods from the vagaries of the “invisible hand” and thereby opened up the possibility that government might licitly impose its moral values to ensure a just share of wealth among all persons. Mill's views on redistribution led directly to such experiments as the New Deal which have fostered the “revolution of rising entitlements” underway in many Western countries. That revolution has greatly expanded the material security of individuals—at the price of constricting the range of rights to pursue self-interest.

This development has put the modern corporate attorney in a highly ambiguous position. In an individualist society committed to the theory of rights, the attorney's role is clear: to defend his client's interests even at the risk of threatening the legitimate interests of others. However, in a consequentialist society, the attorney finds himself torn between the interests of his client and those of society. Thus, for example, the Securities and Exchange Commission could take the position in 1978 that, under certain circumstances, a corporation's securities counsel has the obligation to divulge his client's confidences to the corporation's shareholders, to the Commission, and, in effect, to the investment public.

For Prof. Rosenfeld, the dilemma of the modern attorney is a metaphor for the paradox of the individual in our times. Bereft of the sanction of the invisible hand, the individual is caught in a morass in which the pursuit of self-interest is increasingly viewed as inimical to the common good. Attempts to reconcile the two with regulations drastically limit the freedoms of a “free” society, while rendering the moral morass still deeper and murkier.

Shifts in the Meaning of Property

Kenneth J. Vandevelde

• Harvard Law School

“The New Property of the Nineteenth Century: The Development of the Modern Concept of Property.” Buffalo Law Review 29 (Spring 1980): 325–367.

The concept of property has been central to the development of both public and private law throughout the history of the United States. During those two hundred years, however, the meaning of the term “property” has changed radically. Prof. Vandevelde's article traces the main transformations of the concept of property from the Revolutionary period down to our own day.

In broad outline, Vandevelde's thesis is this: at the beginning of the nineteenth century, property was ideally defined as absolute dominion over things. Under this absolutist and physicalist conception, the law of property was based on a taxonomy of things—with the nature of each thing determining its treatment at law. “Real property” consisted of things which were fixed and immovable (such as land and tenements), while “personal property” comprised movable things (such as money and goods).

Real property was further divided into “corporeal hereditaments” (land) and “incorporeal hereditaments” (advowsons, tithes, commons, ways, offices, dignities, franchises, corodies, annuities, and rents). Incorporeal hereditaments presented a conceptual problem for the great legal systematizer Blackstone, since the holder of such property held no thing—only a right, albeit a right issuing from a thing. Blackstone solved the problem by reifying these rights. They became “things,” though in name only.

As the nineteenth century progressed, numerous exceptions to the physicalist elements of Blackstone's conception of property were incorporated into the law. Acting at times on a theory of natural law and at other times on the instrumentalist public policy of a positive state, courts increasingly sought to protect value as property, even though no thing was involved. Soon any valuable interest could be declared the object of property rights. This process of dephysicalization threatened to place the entire corpus of American law in the category of property—a conceptual imperialism which created severe problems for the courts.

The absolutist conception of property also came under assault. Throughout the nineteenth century, courts discovered that some interests which deserved protection could not be protected absolutely without unduly restricting the activity of others. Courts thus created less protected forms of property. However, once they admitted that all property was not equally protected, the designation of an interest as “property” could no longer provide a basis from which legal rights could be automatically deduced. As a result, such a designation no longer settled a controversy. It merely restated the dispute.

By the beginning of the twentieth century, a new conception of property emerged and was stated in its definitive form by Wesley Newcomb Hohfeld. The new property was defined as a set of legal relations among persons. Property was no longer conceived as dominion over things. Moreover, property was no longer absolute, but limited, with the meaning of the term varying from case to case.

The new conception of property failed to solve the problems caused by the decay of the Blackstonian conception. Courts still had to decide whether a particular interest was property, and, if it was, how much protection it merited. The new property concepts proved unable to settle controversies and to legitimate results. Courts overcame their paralysis by deciding cases with overt recourse to political categories. In so doing, however, they abandoned the myth of judicial neutrality and, with it, their own legitimacy. The “government of laws and not men” which had seemed clearly to exist to Chief Justice Marshall had been exposed as, in truth, a government of “nine old men.” The creation of the new property was, in microcosm, the destruction of the rule of law.

Balzac on Natural Law vs. Corrupt Law

Thomas E. Carbonneau

• Tulane University School of Law

“Balzacian Legality: A Proposal for Natural Law Juridical Standards of Legitimacy.” Loyola Law Review 27, no. 1 (1981): 1–39.

Since its publication in the nineteenth century, Honoré de Balzac's (1799–1850) Comédie Humaine has been praised for its incisive observations of the social milieu of its time, as well as for its detailed descriptions of the world of commerce and finance. The accuracy of Balzac's social observations, however, also extends to his treatment of the law.

Balzac's personal experience in and intimate acquaintance with the law is unique, at least in the annals of French literary history. He was one of the few French writers to hold a law degree and to have clerked in a law office. Prof. Carbonneau devotes the greater part of his article to an analysis of the social function of law in Balzac's novel Les Illusions Perdues. As the title suggests, the novel describes the confrontation between purity of ideals and the corrosive immorality of society, a theme that runs through the fabric of many Balzac novels.

In this narrative, Balzac tells how the unscrupulous Boniface Cointet defrauds an idealistic inventor, David Séchard, of a secret process which will surely revolutionize the paper-making industry. Balzac shows that the only weapons Cointet needs to secure his goal are an acute knowledge of human nature and a familiarity with the technicalities and loopholes of the commercial code. Significantly, his plan includes the cooperation of the sollicitor, Petit-Cloud, whose enormous desire for success is buttressed by an utter insensitivity to the ethics of his profession. Through a series of stealthy, but perfectly legal maneuvers, Cointet gains control of Séchard's paper-making formula.

Throughout his story, Balzac attempts to highlight the inconsistencies between the application of the laws and their theoretically expressed purpose. As he saw it, the origin of the law's perverted use lay in the fact that, even though it affects all men, its rules and purposes are known only to a small minority of interested parties. This ignorance of the law on the part of the majority is not the result of an intrinsic lack of intellectual ability. Rather it stems from the entanglement of legislative provisions and from the befuddling complexity of the legal process. Thus does the legal system invite its own subversion by an elitist manipulation of its technicalities. The laws cease to refer to a higher standard of what is just and instead become tools for the aggrandizement of a privileged few.

For Balzac, the use to which law is put in a particular society depends less on its theoretical foundations than on the social mores which predominate. He saw law in his day as the instrument of an unbridled individualism in which respect for natural Justice bowed before the Machiavellian attitude that morality is irrelevant to the assessment of man's conduct in society.

From all this, Prof. Carbonneau concludes that the Balzacian vision of law is closely akin to natural law norms. The legal devices invented by men can serve no legitimizing function in society, unless the men who promulgate and administer them identify them with an overriding moral sense. Unless legislators instill the legal system and its judicial offices with moral consciousness, law, instead of cultivating and refining man's precious humanity, will turn against it and finally destroy it.

Aquinas and Natural Rights

Jack Donnelly

• Tulane University

“Natural Law and Right in Aquinas' Political Thought.” The Western Political Quarterly 33 (December 1980): 520–535.

A linguistic analysis helps clarify a problem in the history of political thought: Aquinas' theory of natural law and its application to the problem of obeying unjust law. Aquinas' theory can be understood only when we pay careful attention to its specific linguistic features, and in particular to the meaning of the central concept, “right” (jus). A distinction is drawn between two senses of “right” (“right that” and “right to”). This distinction is important not only for the light it casts on the difference between high medieval and modern political thought, but in itself and for its relevance to contemporary discussion of human “rights.” After sketching Aquinas' theory of law, with particular reference to natural law, the author raises the central problem—what ought to be done in the face of unjust laws and a tyrannical ruler? The last sections of the article elucidate the basis for Aquinas' answer that, in most cases, the tyrant must be endured.

For Aquinas, unjustified or unauthorized action against even an unbearably vicious tyrant is not only no better in kind than the acts of the tyrant, but it is much more dangerous. Resistance is likely to produce faction, sedition, and even civil war, thereby forfeiting all the benefits of political society in the attempt to remedy a few of its contingent defects. Aquinas finds himself in a dilemma, torn between the two central functions of human law, restraining evil and fostering virtue. To tolerate the human evil of the tyrant means that, at least temporarily, we must renounce the fostering of virtue as a primary goal of law. By requiring obedience to the tyrant, he deprives citizens of the protection of the natural law by abrogating its binding force and its priority over human law.

The conceptualization of Aquinas' treatment of the problem of unjust laws is misleading since it suggests an embryonic theory of natural or human rights in Aquinas' notion of natural law. Donnelly believes that such notions are totally absent from Aquinas and discusses in great detail the relation of justice, right, and law in Thomas' thought. His crucial distinction is between two senses of “right”: “right that” (as “It is right that Smith do X,”) and “right to” (as “Smith has a right to X”). Aquinas acknowledges only one right (“right that”). Aquinas' jus is a different concept from our modern notion of human “right.” For Aquinas natural law does not give rise to “rights” in the sense of “right to” but only states what is right in the sense of “right that.”

A tyrant is acting evilly and unjustly and it is not “right that” he violate God's natural law, but he owes his moral obligation to God and not to his citizens. For Aquinas, citizens cannot (except by an-achronistically invoking modern rights theory) claim that they have a “right to” resist or possess a “right to” self-government that “entitles” them to depose a tyrant or establish a ruler of their choice. Aquinas subscribes to a view of politics which formulates what is right almost exclusively in the sense of “right that” and which also wholly lacks the idea of natural or human “right to.” Injured citizens have available to them, within Thomas' framework, claims which they are not entitled to enforce. “The demands of natural law may be quite considerable, but the position of the people in a political system based on such a view of natural law, and the operation of the system, would be quite different from one based on natural or human rights.”

Man's End, Society & State in Aquinas

Edgar Scully

“The Place of the State in Society according to Thomas Aquinas.” The Thomist 46 (July 1981): 407–428.

Aquinas' theory of the state takes off from Aristotle's formula, “Man is by nature a political animal,” but then goes beyond it in several important respects that stress the importance of society and individuality in reference to the state's claims.

Man is naturally a political animal because the laws of the state are ordered to fulfill man's need for a life of virtue, just as the family and household are ordered to fulfill man's daily needs. Further, man's ability to communicate through speech about the just and the unjust is fulfilled in the state. Also man has a unique need for friendship, and the state establishes a social atmosphere in which friendship is possible. As distinctly human virtues, the cardinal virtues of prudence, justice, fortitude, and temperance are all political virtues since they can be commanded by the legal justice of the state. On the other hand, insofar as these same virtues are ordered to God as man's supernatural end, there is an area of human action that is above and beyond the jurisdiction and competence of the state.

The growing complexity of medieval society, the development of urban and commercial life, tended to make the political come to be identified with “government” alone. Accordingly, Aquinas emphasized that man is both a political and a social animal. He thereby affirmed that the governmental dimension of society should not be divorced from the interests of society. He also intended to affirm that the religious and private life of the people is not part of the political order, thereby limiting the supremacy of the state.

Since man is a social animal, Aquinas inferred that man must be ruled by some governing agency to care for the common good, or else the group would disintegrate. Humans may pursue their own good on their own, but the common good is a distinct effect over and above individual goods and it therefore requires a distinct cause to promote it. A governing power is such a cause without which man's social nature cannot be fulfilled. The state, however, is always at the service of the body politic and society as a whole.

Natural Law & Professor Finnis' Book

Henry Veatch

• Professor Emeritus, Georgetown University

“Natural Law and the ‘Is’-‘Ought’ Question.” Catholic Lawyer 26 (Autumn 1981): 251–265.

At the beginning of his article, Prof. Veatch offers a tribute to John Finnis' book, Natural Law and Natural Rights. He views it as a remarkable achievement which has almost singlehandedly restored natural law to serious consideration among contemporary philosophers.

Despite his admiration, however, Veatch takes issue with one crucial section of the book, the part entitled “The illicit inference from facts to norms.” The very title of the section seems to negate the legitimacy of basing norms on factual data. “Yet,” Veatch asks, “how can the enterprise of a natural-law ethics be anything other than a search for some basis for morals and ethics in nature itself, and thus in the facts of nature?”

In Veatch's view, Finnis interprets Aquinas as maintaining that the first principles of natural law are not inferred from metaphysical propositions about human nature, or from propositions about the nature of good and evil, or about the function of a human being. Nor are they inferred from a teleological conception of the ends and purposes of nature or any other conception of nature.

In order to maintain a wall separating norms from nature, Veatch asserts, Finnis (like Germain Grisez) puts forward the Aristotelian distinction between practical and theoretical sciences—an entirely legitimate distinction, Veatch admits. Since ethics is a practical science, it is established on the first self-evident principle of practical reason, enunciated by St. Thomas as: Bonum est faciendum et prosequendum, et malum vitandum. Grisez carefully translates this admonition as: “Good is to be done and pursued, and evil is to be avoided.”

According to Grisez, good has the intelligibility of a purpose or end, “good being simply what each thing tends towards.” Veatch objects that, if good is to be construed simply as an end or as an object of inclination and desire, a dangerous ambiguity immediately arises. He explicates this ambiguity with what he calls “the Euthyphro test.” In Plato's dialogue Euthyphro, Socrates raises the question of whether a thing is said to be good because it is beloved of the gods; or rather is it beloved of the gods because it is good?

According to the Euthyphro test, if goodness and value are entirely relative to tastes and inclinations, no grounds exist for holding that good is anything to be done (faciendum), to be pursued (prosequendum), or that evil is to be avoided (vitandum). Grisez must go beyond his statement about goods as inclinations to specify that they are objects of inclination in the sense of being things that we ought to be inclined towards—whether we actually are or not. This means that goods are not goods only because they are desired, but good in themselves—goods as beings. To obviate the ambiguity posed by the Euthyphro test, good must not only be considered according to practical reason, but also in its metaphysical dimension. Clearly, there can be no such domain of practice or practical reason, unless it be in terms of metaphysics and of theoretical reason through which it receives its proper determinations.

A breach has thus been effected in the wall of separation between practical reason and theoretical reason, between ethics and metaphysics, between nature and morals, between “is” and “ought.” Without such a breach, Veatch comments, one might envision both Finnis and Grisez treading on a slippery slope into an ethics of nomos (convention) rather than physis (nature)—an ethics which is so prevalent today and so irreconcilable with anything resembling an ethics of natural law.

Professor Finnis Replies

John Finnis

• University College, Oxford

“Natural Law and the ‘Is’–‘Ought’ Question: An Invitation to Professor Veatch.” Catholic Lawyer 26 (Autumn 1981): 266–277.

In his reply to Prof. Veatch, John Finnis finds that none of Veatch's basic questions and objections properly apply to either himself or Germain Grisez. Finnis denies that either he or Grisez has published anything that can reasonably be interpreted in context as asserting that ethics has no basis in the facts of nature, that a wall of separation divides “is” from “ought” and facts from values, that there is an absolute independence of ethics over against metaphysics, or that human good is an end or ends which human beings have an inclination towards rather than the ends that perfect human beings.

Given such a basic misunderstanding of his and Grisez' position, Finnis makes a two-fold invitation to Prof. Veatch: first, to read strictly and fully what he and Grisez have written; then second, and more importantly, to examine some of the serious questions which his book Natural Law and Natural Rights addresses to those who interpret Aquinas and Aristotle in Veatch's manner.

Who would guess from Veatch's polemic, Finnis asks, that he had reached the same result in his book using the Euthyphro test as Veatch did in his article? Finnis did this prominently in chapter III, which contains a detailed examination of the nature of judgments concerning human good, by means of an exploration of our judgments regarding one particular basic human good—knowledge or truth.

Having devoted more than a chapter of his book demonstrating it, Finnis obviously favors the idea that metaphysics is a part of (and in a sense the fundamental part of) the great search for clarification and explanation. In the book, he openly called his demonstration “not practical but theoretical or metaphysical.” He also claimed that answers to the theoretical or metaphysical questions raised in the chapter are necessary if there are to be any fully satisfactory answers to the deepest practical questions about the topic of human good.

However, Finnis also claimed—and this is what Veatch seems to object to—that just as “a good explanation of molecular motion can be provided” without explaining the dependence of the universe and of molecular motion on the uncaused cause, “so too…natural law can be understood, assented to, applied, and reflectively analyzed” without exploring the metaphysical questions to which Finnis referred.

Finnis' statement simply gives serious consideration to Aquinas' frequently repeated claim that even rustics understand the natural law. Following the Summa Theologica I–II q. 58, a. 4c, it is clear that one can indeed be morally upright without speculative (i.e. theoretical, ‘is’ knowledge) wisdom (sapientia, evidently stricto sensu), without the practical knowledge of craftsmen (art), and without speculative knowledge (scientia). To admit this does not negate the ultimate importance of metaphysical principles to the derivation of practical ethical norms.

Finnis comments in conclusion that: “This (his and Grisez') pedagogical order of priorities seems to be more faithful to the content of Aristotle's and Aquinas' theories of ethical knowledge. It has the disadvantage, I acknowledge, of requiring the reader to attend to more than occasional sentences in fragments of our respective works.”

19th-Century Tort Law & Industry

Gary T. Schwartz

• UCLA School of Law

“Tort Law and the Economy in Nineteenth Century America: A Reinterpretation.” The Yale Law Journal 90 (8) 1981: 1717 – 1775.

A prevailing view among American tort law historians maintains that nineteenth-century tort doctrine was deliberately structured to accommodate the economic interests of emerging industry. According to these scholars, American courts jettisoned a potent prenineteenth-century rule of strict liability in favor of a lax negligence standard, leniently applied that standard to enterprise defendants, administered a severe defense of contributory negligence, and placed strong controls on negligence law under the name of “duty.” Prof. Schwartz' article systematically challenges these premises first by assembling pre-nineteenth-century background material in tort law cases and then by examining important nineteenth-century tort cases tried in the states of New Hampshire and California.

A study of pre-1800 English tort doctrine and of early American models reveals no consistent distinction drawn between areas covered by strict liability and those governed by a negligence standard. Ambivalence more than clarity predominated in the application of these norms to such disparate areas as fire, collision, animal, and employer cases. Prof. Schwartz finds however that the available evidence disputes the notion of a strong pre-nineteenth-century strict liability tradition. Instead, strict liability strands in older English and early U.S. law seem blurred, while the negligence strands appear both more distinct and capable of extended application.

Turning to New Hampshire and California case law, Schwartz disputes the notion that the nineteenth-century negligence system can properly be characterized or disparaged as an industrial subsidy. On the contrary, the Supreme Courts of the two states expanded on the negligence standard in ways that rendered it both ambitious and demanding—narrowing in the process the gap between negligence and strict liability. Far from erecting a duty pre-requisite to every tort claim, the Courts easily recognized that everyone has a general duty to everyone else to avoid negligent behavior.

The record in New Hampshire and California reveals no tendency on the part of judges to shelter emerging industries from what otherwise would be their liability in tort. If anything, novel forms of risk taking generated by the profit motive were viewed with enhanced, rather than reduced, suspicion. To this extent, the Courts were less influenced by, than initiators of, populist impulses.

Schwartz cites numerous examples of this judicial populism. Despite the importance of turnpikes and especially textile mills to New Hampshire's economy in the early nineteenth century, the state's Court subjected both turnpike and textile companies to emphatic liabilities. Railroads loomed large in the latter half of the century, yet, in the New Hampshire and California Courts, railroad companies suffered defeat on the vast majority of contested issues. In opinions animated by a concern for safety, the California Court spurned a power company's implicit request for a liability rule subsidy and held newly formed elevator companies to exacting liability standards.

Thus, the theory that nineteenth-century tort law was designed to benefit private economic interests is misleading. Evidence from two states shows that the Courts, in implementing the negligence system, were solicitous of victim welfare and generally bold in the liability burdens they imposed on corporate defendants. The overall performance of tort law in the two states studied need not be disowned as offensive or discreditable. In truth, the evidence indicates a surprising continuity between nineteenth-century tort law and the law we now recognize in the late twentieth century.

The Letter and the Spirit of Contract Law

Leon E. Trakman

• Professor of Law, Dalhousie University

“Interpreting Contracts: A Common Law Dilemma.” The Canadian Bar Review 59 (June 1981): 241–300.

The common law court traditionally has been faced with a dilemma. Should the court exercise caution and literalism in construing mercantile agreements by examining only the explicit words of the agreement in interpreting the intention of the parties? Or, by contrast, should the court be bold and creative in construing agreements and determine the intention of the contracting parties from the circumstances surrounding the transaction, from the business conventions and conceivably from the judge's own perception of what is fair and reasonable in the situation?

Professor Trakman analyzes to what extent common law judges are inclined towards a cautious or a bold approach in construing nonperformance obligations in commercial contracts. His study analyzes whether particular judicial methods of construing nonperformance obligations in contracts are functional and the extent to which they are useful in practice. The author emphasizes the philosophical values of judges, their approaches to interpretation and the link between their personal values and their interpretation of nonperformance clauses in business contracts. While recognizing that judicial ideology is essential in developing the common law, the author believes that the existence of a judicial methodology, a process of consistent reasoning, is even more fundamental if the common law of nonperformance is to ensure the viability of commerce.

Professor Trakman studies mercantile freedom of contract (autonomy) in common law and international commerce, the common law function of narrow interpretation and broad construction of nonperformance clauses, “intentionalism” and the express terms of a commerical contract, the limitations of mercantile autonomy, judicial creativity in construing terms of a contract, judicial construction as a recourse to equity, judicial construction and the rule oriented approach, and the possibility of reform.

The process of judicial investigation progresses from an analysis of the literal terms of nonperformance clauses to a synthesis of the negotiations between the parties, their past and present business understandings and their performance expectations. Construction ought to include consideration of the type of trade practices which businessmen actually employ, their market habits, and their industry usages. What merchants reasonably intend from a judge's perspective relates directly back to what they actually intend. The probable behavior of merchants blends in with the actual behavior of merchants.

“Implied terms” are only supportable as methods of judicial construction where the fictional basis of implied terms conforms to actual values prevailing among specific merchants within identifiable environments. The “foundations” or “objects” of agreements are only viable concepts where courts are aware of the dynamic features of business, the profit and market goals that underlie trade, as well as the give and take that evolves in buying and selling in the marketplace.

The utility of judicial boldness or caution is a relative, not a constant, phenomenon. The manner of construction by courts alters as parties, markets, and trade practices alter. The form of construction serves as a means towards a functional end, not an end in itself. Ultimately, the “life of the law” lies in the actual experience of commercial practice itself as the reference point for judicial interpretation.

The Limited Liability Corporation

Christine E. Amsler, Robin L. Bartlett, and Craig J. Bolton

• University of Pennsylvania, Denison University, and University of Dallas

“Thoughts of Some British Economists on Early Limited Liability and Corporate Legislation.” History of Political Economy 13 (Winter 1981): 774–793.

The origins and development of the limited liability corporation (LLC) have either been little studied or distorted by hostile ideological presuppositions. Contrary to popular anti-corporate mythology, the “beast of corporatism” was not spawned at the end of the 19th-century by “mature capitalism” without any previous economic analysis. The authors seek to give some background on the earlier intellectual, economic, and legal history of the LLC and raise research questions for the future. First, they trace the steady, if not always progressive, development of British common law from the 16th century down to the 1850s. Next, they examine the attitudes, pro and con, of the famous British classical economists (Smith, Senior, Tooke, J.S. Mill, and McCulloch) toward the corporate form of business organization in the years before its final legal establishment. Finally, they sketch the series of Parliamentary inquiries and reforms during the 1850s and 1860s as a background to subsequent reactions by late classical and early neoclassical economists (including the seminal assessment of corporatism by Alfred Marshall).

By way of broad generalization, even in England, the birthplace of industrialization and the traditional home of legal and social pragmatism, the modern LLC had a tortured and uncertain birth. While championed by a few prestigious economists, it was vilified by many (such as John Ramsey McCulloch). Even extreme economic and legal reformers were torn between what seemed an opportunity to benefit the poor or middle classes (by reducing their risk in investing their modest savings through legally limiting their liability) and condemnations of limited liability corporations as impractical and unjust. Even after Parliament had committed itself, in 1844 (the Registration Act) and again in 1856 (the Joint-Stock Companies Act), nearly half a century was required in order to reach a well-functioning body of statutory law. The notion that the LLC was a ‘necessary’ product of capitalist development appears to be historical hindsight.

Finally, it is surprising that the debate over the merits of the LLC has remained on such an elementary level. While Williamson, Alchian, and others have analyzed in some detail Smith's and McCulloch's contentions concerning the cost effectiveness of corporate organization (see Eirik Furubotn and Svetozar Pejovich, eds. The Economics of Property Rights, 1974), Marshall's more complex and provocative suggestions have not been intelligently followed up. His correspondence indicates that he saw the conversion of many markets from partnerships to corporate domination as an evolutionary trend but he expressed fears of an industrial world dominated by a few large firms by reason of special legal privileges.

Corporations & Transaction Costs

Oliver E. Williamson

• University of Pennsylvania

“The Modern Corporation: Origins, Evolution, Attributes.” Journal of Economic Literature 19 (December 1981): 1537–1568.

There is virtual unanimity over the proposition that the modern corporation is a complex institution which has played a crucial role in the development of modern Western economies. However, there is much less agreement on what its attributes are and on how and why it has evolved to take on its current form. Prof. Williamson argues that the modern corporation is to be understood mainly as the product of a series of organizational innovations that have had the purpose and effect of economizing on transaction costs.

After discussing the development of the basic corporate form in the nineteenth century, Williamson goes on to analyze what he considers the most significant organizational innovation of the twentieth century: the gradual shift from the centralized, functionally departmentalized or unitary (U-form) structure to the multidivisional (or M-form) configuration.

As corporation activities grew more numerous and complex at the beginning of our century, the inherent weaknesses of the centrally governed, departmentalized company became apparent. Administrative problems such as coordination, appraisal, and policy formulation increased to such an extent that senior executives found themselves unable to handle their entrepreneurial responsibilities efficiently. U-form structure had created a communications over-load in which the welter of details to be attended to hampered concentration on global goals.

Responding to this administrative glut, Pierre S. DuPont and Alfred P. Sloan devised the M-form organization for the DuPont Company during the 1920s. This new structural mode involved the creation of semiautonomous operating divisions (mainly profit centers) organized along product, brand, or geographic lines. The operating affairs of each were thus managed separately.

DuPont and Sloan saw, however, that more than a change in decomposition rules was needed for the M-form to be fully effective. They thus created a general office consisting of a number of powerful general executives and large advisory and financial staffs to monitor divisional performance and engage in strategic planning. In this way, the M-form removed executives responsible for the destiny of the entire enterprise from routine operational activities, and so gave them the time, information, and even psychological commitment for longterm planning and appraisal. Although the structure was imitated very slowly at first, adoption by U.S. firms proceded rapidly from 1945 to 1960. Wide acceptance of this form by European companies has occurred from the 1960s to the present.

The American advance in adopting the M-form innovation enabled the U.S. to pioneer in the development of two extremely potent corporate forms: the conglomerate and the multinational. Both structures have been severely criticized since their inception. Nonetheless, in Prof. Williamson's view, the significant transaction cost economizing effected by both warrants more sympathetic assessments.

Specifically, conglomerates in their diversity have shown themselves to be superbly equipped for allocating resources to valued uses. The activities of the multinational, on the other hand, have been selective in a most positive way—being concentrated in the more technologically progressive industries where higher rates of research and development are reported and where technology transfer poses greater difficulties. Multinationals can smoothly transmit new technical knowledge from one national branch to another. This obviates the often thorny dilemma of a foreign company which buys information, the exact value of which will not be known until after the sale has been consummated. Thus, patterns of direct foreign investment by multinationals cannot simply be explained as the pursuit of monopoly, as is so often charged. On the contrary, these investment patterns are, on the whole, consistent with effective transaction-cost reasoning.

Corporation Law & the Progressive Era

Melvin I. Urofsky

• Virginia Commonwealth University

“Proposed Federal Incorporation in the Progressive Era.” The American Journal of Legal History 26 (April 1982): 160–183.

The rapid industrialization of America in the latter part of the nineteenth century brought not only enormous material benefits to the country but serious social, economic, and political problems as well. For many observers, the most ominous aspect of the transformation was the growth of corporate ownership and operation—most especially the huge firms resulting from mergers. The drive toward consolidation reached its peak between 1898 and 1901, when 2274 firms disappeared as a result of merger and merger capitalization totalled $5.4 billion.

Reformers of the progressive period regarded big business as a threat to democratic institutions and acted upon that perception. Louis D. Brandeis' fear of “the curse of bigness,” for example, may have rested on faulty economics, but many shared his concern. On the other hand, the defenders of big business and monopolies maintained, following the principles of laissez faire and Social Darwinism, that giant corporations had arisen from “natural causes.” To interfere with their operations would not only hinder progress but adversely affect the strength of the American economy.

Given such divergent points of view, it is surprising that both the proponents of reform and the champions of big business came to support the notion of an incorporation law on the federal level. The support of each party for the proposal, however, sprang from quite different reasoning.

Reformers had seen one state after another (beginning with New Jersey) pass incorporation laws of such leniency that little or no check was being put on the tide of corporate abuse. The laws were essentially designed to convince corporations to locate their headquarters in the state concerned. If this were accomplished, the state's tax revenues would substantially increase. In the face of this trend, progressives finally abandoned any hope that corporate reform would ever occur on the state level and saw a federal incorporation law as their only recourse.

Supporters of big business, from a different vantage point, paradoxically followed the same federal strategy. They viewed the multiplicity of state regulations as a serious hindrance to the progress of corporations, which had grown to operate on a national scale. In their eyes a federal incorporation law, strict or lax, would standardize conditions for doing business throughout the country. Such nationwide uniformity would aid the growth of corporations and stimulate the nation's economic development.

Curiously, even with widespread support for a federal law, none was ever passed. Successively proposed by Presidents Roosevelt, Taft, and Wilson, federal incorporation laws foundered on disagreements in Congress over such details as whether licenses or charters should be issued and whether labor unions should be exempt from anti-trust legislation. As a result, despite substantial agreement, Congress never enacted an incorporation law.

Nevertheless, in piecemeal fashion, Woodrow Wilson succeeded in giving businessmen and reformers much of what they had been seeking for over a decade. The Federal Reserve Act ‘rationalized’ the banking system. The Clayton Anti-Trust Act removed some of the uncertainty surrounding the Sherman Act, while the creation of the Federal Trade Commission gave businessmen an agency which could rule on the legality of their operations. As a result of these measures, federal incorporation, once an idea whose time had come, ultimately became an outmoded concept.

The Bureau of Investigation: Political Spying

David Williams

• Cornell Law School

“The Bureau of Investigation and Its Critics, 1919–1921: The Origins of Federal Political Surveillance.” The Journal of American History 68 (December 1981): 560–579.

In the hope that legislation may bar the resumption of political surveillance, Congress is considering a comprehensive charter for the Federal Bureau of Investigation (F.B.I.). As Mr. Williams sees it, however, history provides scant grounds for optimism over the success of such laws. His article chronicles the activities of the F.B.I.'s immediate forerunner, the Bureau of Investigation (B.I.) during the years following World War I. His study of the origins of federal political surveillance leads to several conclusions.

First of all, the tone of the B.I.'s investigative reports demonstrates not only the agency's extreme antiradicalism but also its hostility toward ethnic and religious minorities. The bureau's narrowly conceived standards classified those who challenged the conservative political order in any way as unpatriotic or “un-American.” The Irish-Americans favoring Irish independence, Jews advocating the establishment of a Jewish national homeland, civil libertarians defending the rights of dissidents, and anyone advocating the recognition of the U.S.S.R. were considered as engaged in subversive activities.

Secondly, while the B.I.'s excesses may have shocked some Americans, Congress and the president made no concerted effort to halt such abuses. Only a few liberal congressmen, lawyers, and clergymen condemned the wholesale suppression of radicals during the Red Scare. Since most Americans assumed that restrictions on the First Amendment rights of radicals were “the price of vigilance,” the libertarian position attracted little popular support. The courts, along with the organized bar, reinforced the belief that the government should protect the public from pernicious radical propaganda.

Next, as head of the G.I.D., J. Edgar Hoover found that Congress and the president would tolerate the bureau's antiradical activities as long as it seemed that its efforts were limited to silencing dissident voices. At the same time, Hoover came to understand the importance of secrecy and confidentiality. Following the controversial deportation raids of 1920, Hoover appreciated the need to respect due process at least publicly and realized that, if the B.I. engaged in constitutionally questionable activities, these activities had to remain secret. As a result, a precedent was established. For the next fifty years, fear of adverse publicity continued to be an important, if not central, element in the formulation of F.B.I. internal security policies.

Finally, a study of the B.I.'s investigations of its critics, especially in the light of newly declassified documents, casts doubt on the widespread belief that federal surveillance abuses result from the “radical impact of the Cold War on American values and institutions.” On the contrary, the development of a strong elite-dominated government as well as the gradual acceptance of government secrecy were well under way before 1945. Given their initial impetus by American involvement in World War I, the B.I.'s domestic intelligence responsibilities grew dramatically during the first Red Scare. By 1924, the foundation of a permanent surveillance apparatus was firmly in place.

The First Amendment: 1918–1928

Robert M. Cover

• Yale Law School

“The Left, the Right, and the First Amendment: 1918–1928.” Maryland Law Review 40 (3) (1981): 349–388.

In the wake of World War I, American democracy felt itself severely challenged by explosive developments which were shaking the forms of political order around the world. With the political collapse of Europe, the struggle over the League of Nations, the Russian Revolution, and the rise of fascism, American democracy became a principal contender in a global struggle for ideas and power. At the same time, Americans at home felt increasingly threatened by what they judged as political ‘pathologies’ brought in from abroad by immigrants and intellectuals.

It fell to the Supreme Court, as the foremost articulator of American democratic principles, to frame a response to these challenges. The response had to occur on two levels. On the ideological level, it was necessary to mark distinctions between the American variant of capitalist democracy and the newly spawned foreign political ‘pathologies’—in other words, to describe and reaffirm America's distinct mission and experience. On a practical level, it was crucial to delineate an effective defense against the political pathogens. For, while Europe was clearly the source of the disease, the very nature of the struggle—its articulation in the transnational terms of class or race warfare—was that of a potential civil war.

The conservatives and liberals on the High Court of that period addressed themselves to different aspects of these complex questions. For the conservatives, led by William Howard Taft, the disorderly politics of the street that had emerged in Europe and America after the war threatened not only property but civil society itself. The conservatives' dedication to the elimination of private violence was most evident in the legal weapons they provided the federal courts against picketing and organization work by unions. Nonetheless, after 1919, these same conservatives were prepared to acquiesce in some parallel restraints against the radical right. Moore v Dempsey, for example, implicitly overruled Frank v Mangum and empowered federal courts in habeas corpus cases to pierce the record and determine independently of the state court whether a state trial was dominated by a mob.

The intellectual turmoil of the period raised serious questions concerning the legitimate parameters of dissent in American society. It was in this area that the liberals (Holmes and Brandeis) made their most important contributions. In his concurrence to Whitney v California, for example, Justice Brandeis began by characterizing the essential choice of political modes as being one between the “deliberative” and the “arbitrary.” The essay then validates a commitment to the deliberative mode as an act of the Founding Fathers to which an ongoing commitment is always necessary.

In advocating the widest possible freedom of expression, Brandeis acknowledged the danger of allowing calls to disorderly, nondeliberative change in politics. Nevertheless, in the face of this danger, the commitment to liberty required an act of courage demanded by the very structure of our politics. For Brandeis, law mediates the dichotomy between the deliberative and arbitrary, between reason and force in politics. It becomes justifiably arbitrary and coercive only by remaining the product of a truly deliberative process.

It is a measure of the distinction of the Taft Court that it posed to the country and to the world a basic dilemma: Is it possible to stop the coercive, violent forms of street politics without resorting to the arbitrary violence of the law? The conservatives had resolved to accept the force of law, the voice of the then dominant community groups. Justices Brandeis and Holmes, on the other hand, expressed a different faith and a resolve to have it both ways.