Constitutions, Culture, and the Economy

Constitutional law has often been used to shape economies, but there are limits to the law’s ability to influence economic culture, especially when societal priorities no longer accord with constitutional principles.

The Supreme Court’s decision to uphold Obamacare sharply reminds us of constitutional law’s significance for economic life. NFIB v. Sebelius, however, is not the first or even the most controversial effort to use constitutional law to shape economies. Both America and European countries have a decades-long history of doing so.

Throughout America, for instance, amendments to state constitutions have been used to cement right-to-work laws in place. Across the Atlantic, European nations such as Germany and Spain have written public debt limits into their constitutions. In 2010, the Nobel Prize economist James Buchanan called for what he described as the “constitutionalization” of money. Ongoing failures to prevent the politicization of monetary policy meant, Buchanan argued, that America’s constitution required amending to bestow genuine independence upon a monetary authority. In Buchanan’s words: “Something analogous to the independent judiciary, under the Supreme Court, seems required—a monetary authority that is independent of politics, but which remains itself bound by the parameters set out in the constitution itself.”

On one level, the rationale for this and similar proposals is that certain protections, entitlements, and institutions need to be rendered relatively immune from the ever-shifting whims of often fickle, transitory majorities as well as governments and legislatures willing to manipulate economic affairs to realize self-interested goals. Constitutionally limiting a government’s capacity to increase public debt, for example, restricts its ability to engage in extensive borrowing to finance potentially vote-winning but fiscally unwise spending during election years. In this sense, the rules of economic life are a question of constitutional choice.

To that extent, all economies—including market orders—are inevitably subject to some degree of human design and do not simply “evolve.” But while using constitutional law to realize particular ends is understandable, there are limits to what it can do in terms of shaping economic life. Equally important is the role played by the normative priorities that underpin and shape constitutions and a society’s economic culture more generally.

Constitutions are more than power-maps that explicate the powers wielded by different political institutions. They also express fundamental principles that a society considers valuable enough to merit special protection. In this sense, constitutions (like all laws) perform a pedagogical function. As Buchanan points outs, the very process of formally amending the US Constitution to establish an independent monetary authority “would modify public attitudes.”

Yet constitutions reflect as much as they shape a society’s economic culture, understood as the values, norms, conventions, and expectations that characterize economic life. And once that culture changes, the constitutional order rarely remains the same, regardless of the intentions and written words of the constitution’s drafters. This point was well-understood by the school of economists who engaged in the first systematic analysis of the significance of constitutional order for economic life. Associated with Germany’s University of Freiburg, the ordoliberal economists Walter Eucken, Franz Böhm, and Hans Grossmann-Doerth had witnessed how economic life in Germany from the 1870s onwards had become progressively less free in the wake of the increased cartelization of German industry, the spread of protectionist policies, and the militarization of Germany’s economy during two world wars.

Some of these changes owed much to specific constitutional rulings, most notably the German supreme court’s formal approval of the practice of cartelization in February 1897. This decision, the ordoliberals contended, helped turn the institution of contract from a means of promoting free association in the marketplace into a device, as Eucken wrote, increasingly “used [to] restrict or eliminate the freedom of contract” and gradually to undermine “the competitive principle.” Within five years, Eucken observed, 385 cartels had been formed. The ordoliberals stressed, however, that Germany’s general shift toward dirigiste policies was also driven by other factors. Prominent among these was a growing distrust of market institutions and policies across the German political and intellectual spectrum following Germany’s severe financial crash of 1873.

The ordoliberal response, as articulated in books and articles written by Eucken, Böhm, and Grossmann-Doerth in the 1930s and 1940s, was to argue for an “economic constitution” that dramatically limited private actors’ capacity to enlist state power to circumvent the workings of free prices and competition. Here the ordoliberals were less confident than laissez-faire thinkers that the spontaneous interaction of people usually sufficed to produce a flourishing economy. The pursuit of self-interest, Eucken maintained, was usually detrimental when it led to private parties enlisting state power to improve their position vis-à-vis their competitors.

To realize a “privilege-free” competitive economic order, the ordoliberals attempted to identify principles that would effectively proscribe collectivist economic policies as well as prescribe and thereby limit the scope of government economic intervention. Such principles included commitments to a free price system, a stable anti-inflationary monetary system (and therefore an independent central bank), strong private property protections, freedom to contract (without allowing people to contract in ways that diminish others’ liberty to contract), free trade, and responsibility for one’s formal economic commitments and choices. Some of these ideas made their presence felt in postwar German constitutional arrangements, most notably Article 88 of Germany’s Basic Law that paved the way for the establishment of a truly independent central bank. This background helps to explain many Germans’ contemporary attachment to an independent monetary authority focused on maintaining price stability.

Nevertheless the ordoliberals never doubted that the constitutional provisions they sought to use to protect economic liberty had to be rooted in strong normative commitments to a robust conception of freedom embraced by both political elites and the general citizenry. Eucken himself was convinced that this deeper commitment to freedom in the economic realm—and liberty more generally—could neither be generated nor safeguarded by constitutions and laws alone. Freedom, he once wrote to another German economist, inevitably declined “as soon as it lost its religious and metaphysical content.” Indeed, the word ordo was chosen by the ordoliberals precisely because it meant “inner order” rather than ordinate, which means “externally imposed.” In 1940 Eucken stressed that the ordo he sought in economic life was one that “conformed to the reason or nature of Man and things.” This might be construed as the language of natural law.

In many ways, the contemporary European crisis reflects what happens when constitutional rules governing economic activity become detached from the concerns that governments and citizens want to prioritize in economic life. Many of the restrictions on government deficits and public debt written into the 1992 Maastricht Treaty were designed to facilitate a common fiscal environment for a common currency. But they also reflected pressures to limit the seemingly relentless growth of European welfare states, a trend that itself owes something to many Europeans’ attachment to state-provided economic security, no matter what the moral and fiscal cost.

The spending and welfare policies subsequently adopted by many European Union governments, however, underscored that the Maastricht rules concerning these issues simply did not accord with such governments’ political priorities and many Europeans’ economic expectations concerning the state. This is one of the central complaints articulated by the German philosopher Jürgen Habermas in his recent book The Crisis of the European Union (2012). Many EU rules governing the conduct of fiscal and monetary policy do not, Habermas says, reflect what many Europeans (including Habermas) think should be the “democratic values” (social democratic values would be a more accurate description) that guide economic activity throughout the EU.

Whatever one thinks of Habermas’s broader analysis of Europe’s crisis, the gulf between the rules and many Europeans’ expectations is producing a number of dysfunctional results. First, national governments and EU institutions regularly seek to circumvent or ignore existing Treaty provisions, thereby raising significant rule of law questions. Second, constitutional cases are being used in different jurisdictions to advance what might be called social democratic economic priorities.

In 2010, for example, Germany’s Federal Constitutional Court was required to rule on a complex case concerning welfare benefits. In doing so, however, it decided to find a basic right to a minimum income in Article 1 of the German Constitution. This specifies that “Human dignity shall be inviolable. To respect and protect it shall be the duty of all state authority.” While minimum-income policies are a legitimate subject of debate, it is unclear why this needs to be addressed at a constitutional rather than a legislative level—unless, of course, the point is to attempt to realign aspects of a nation’s economic constitution with societal pressures.

None of this means that we should downplay the importance of constitutional law for economic life. Alongside its pedagogical function, the formulation, ratification, interpretation, and amendment of those constitutional articles that address economic issues can create momentum for considerable change in a country’s basic economic settings. That’s why many Americans are so concerned about the long-term implications of the Supreme Court’s Obamacare decision for the scope of Congress’s taxing powers. Yet Obamacare itself flows from a vision of economic life that is inseparable from a current in American politics traceable back to late-nineteenth-century Progressivism. That this vision is significantly at odds with the economic ideas and concerns of America’s founders and the drafters of the US Constitution is not hard to demonstrate. But in a way, doing so would be beside the point. If America is not to head down a social democratic path, reliance on the Constitution is not enough. To use a Romney-esque phrase, culture matters—perhaps especially in the economy.

Keep up with the conversation! Subscribe to Public Discourse today.