Vol. 2 No. 2 (February, 1992) pp. 23-25

ENTERPRISE AND AMERICAN LAW 1836-1937 by Herbert Hovenkamp. Cambridge: Harvard University Press, 1991. pp. x + 443. $39.95.

Reviewed by Paul Kens, Southwest Texas State University

In his introduction Herbert Hovenkamp states that the purpose of ENTERPRISE AND AMERICAN LAW is to explore the relationship between classical political economy and the law. Although there are any number of books available that do this, Hovenkamp captures the relationship in an unusually compelling way. The reason lies in his method and his focus. This is not a study of property and the law, but rather a study of the law's treatment of business. It is not an attempt to explain legal history in terms of a particular economic philosophy, but rather to demonstrate that "American political economists and American judges operated in the same uniquely American "market" for ideas."[p. 96]

Using historical analysis, Hovenkamp illustrates how social, organizational, and technological development led to changes in theories of political economy. Covering a period from the early nineteenth century to the New Deal, he describes the challenges this evolution created for the legal system and how the system responded. The result is a book made up of two distinct parts which are linked by the subject of government regulation of business.

The first part deals with business regulation in general and touches upon some of the great constitutional debates of the middle to late nineteenth century. It begins by describing early challenges to the legal system as stemming from the move from a mercantile to a classical model of political economy. Evolution of the modern business corporation provides a major focal point. Under the mercantile model, Hovenkamp explains, the corporation served as a vehicle through which the state granted special privilege to a particular business venture. Regulation of the corporation's business was viewed as part of the contract that established the franchise. State law thus provided an appropriate mechanism for regulating the corporation, and the contract clause was logically the appropriate mechanism for testing the limits of state authority.

The modern business corporation, Hovenkamp reminds us, grew out of the desire to democratize. General incorporation laws were enacted by Jacksonian state legislatures to separate business from privilege and politics. The result was that the corporation eventually ceased to be a device for granting monopoly, franchise and privilege. Rather, it became simply an efficient means of raising capital and doing business. As a practical matter regulation continued to exist, but it became difficult for either political economics or the law to explain regulation as part of an agreement granting the corporate franchise. Unlike the British who had undergone a utilitarian revolution, American economic thinking continued to be dominated by the classical tradition until late in the nineteenth century. It was a tradition founded upon private agreement and emphasizing free will. There was little room for general business regulation under this theory because assessment of the public good

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was not viewed as a proper function of either economics or government. This was said to be best left to the market.

Economic theory responded by developing addenda to the classical tradition. Theories of market failure and public purpose explained regulation in certain circumstances and economists afforded special status for new technologies and natural monopolies. Emphasizing the Slaughterhouse cases, Hovenkamp describes how such ideas worked their way into the law. And, for him, MUNN V. ILLINOIS represents a maturation of the process of legitimizing general business regulation based on statute rather than the mercantile form of franchise based regulation.

In the second part of this book the discussion of government regulation shifts to antitrust law. Hovenkamp recounts the history of antitrust policy as it was directed at both business and the labor cartel. He describes the impact of the classical tradition on both state corporate and regulatory law and the Sherman Antitrust Act, and points out that its emphasis on contract caused both to be misdirected. A more efficient and realistic neoclassical model influenced by utilitarian and marginalist economic theories did not become dominant in legal thinking until well into the twentieth century.

Hovenkamp is one of a growing group of authors who challenge the idea that nineteenth century American courts were the tool of a conservative elite. Liberal critics today, he says, suffer from the tendency to view the classicists through the lens created by Progressives and New Deal policy makers. His purpose is to demonstrate that, although the judiciary was affected by economic ideas, it was not the pawn of one economic theory. Although one might surmise from his study that the judiciary was influenced by a set of economic ideas most popular among the elite, Hovenkamp shows that this set of ideas was more complex and changeable than has traditionally been portrayed.

The strength of this study is that it dispels suspicions about the nineteenth century judiciary's motives. It is not as convincing, however, if it is intended to disprove the traditional view of the impact of judicial policy. In discussing competing economic theories, Hovenkamp for the most part confines himself to a single tradition. He argues, for example, that the legal doctrine of substantive due process reflects British economist Arthur Cecil Pigou's theory of externalities rather than a more classical version of laissez faire economic theory. Hovenkamp supports his argument very well, but one might wonder what is the point. Although Pigou may have offered a variant that provided a different basis for regulation, he shared with the old classical tradition a view of political economics that envisioned a very limited view of the role of the state. Neither these variations nor the discipline of political economics represented the only ideas regarding politics or philosophy available to judges of the era. Other political, economic, moral, theological, and sociological theorists argued that the classical tradition and its variants had failed to assure fairness in the distribution of the nation's resources. They believed the state should assume a more active role than any version of the classical economic model would allow.

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In describing the role that economic theory played in judicial decision making, Hovenkamp does not question whether it was proper. He assumes it was. And, given this assumption, he has no need to distinguish between constitutional and statutory interpretation. Describing the nineteenth century view of the rights protected by the fourteenth amendment due process clause, for example, he makes a startling claim for the power of economic theory. "That these absolute rights should be identified with economic liberties was uncontroversial," he says, "But economic liberties had to be defined. That was the province of political economy." [pp. 94-95] This mixing of law and economics as if they were parts of the same process suggests that, at any time, the dominant economic theory should be the test for constitutional truth.

Skeptics may question whether the task of interpreting the fundamental law of the nation is best left primarily to economics. Certainly some of the Court's nineteenth and early twentieth centuries critics did. Although Hovenkamp recognizes that the law was sometimes behind the current economic trend, he never considers whether the Court may have been making the mistake of attaching onto the Constitution an economic theory that is not part of the document.

Despite periodic statements of his purpose or thesis, the implication of portions of Hovenkamp's work are difficult to discern. To the extent that it reflects even handedness in his treatment of the subject, however, this characteristic reflects a strength as well as a fault. Hovenkamp avoids the temptation of treating traditional legal history as little more than a conspiracy perpetrated by Progressive historians to disgrace the judiciary and thus advance their political agenda. Taking this extreme, some revisionists seem to be apologists with a political agenda of their own. In contrast, Hovenkamp and others use the revisionist trend as an opportunity to dig deeper into the past and avoid being limited by conventional views. What the reader ends up with as a result of their inquiries is a more sophisticated understanding of the law and the process of judicial decision making.

Although parts of this book tend to be tedious, the author's insight and analysis make it well worth the extra effort. It would be a valuable addition to the library of anyone who is interested in legal history, constitutional theory, or the study of law and economics.


Copyright 1992