Legal foundations of capitalism (classics in economics)
FOUNDATIONS OF CAPITALISM
Classics in Economics Series Warren J. Samuels, Series Editor American Capitalism, John Kenneth Galbraith. With a new introduction by the author The Chicago School of Political Economy, Edited by Warren J. Samuels. With a new introduction by the editor Economic Semantics, Fritz Machlup. With an introduction by Mark Perlman Economics and the Public, William Harold Hutt. With an introduction by Warren J. Samuels The Economy as a System of Power Edited by Marc R . Tool and Warren J. Samuels Epistemics and Economics, G . L . S . Shackle. With a new introduction by the author Essays on Entrepreneurs, Innovations, Business Cycles and the Evolutions of Capitalism,
Joseph A . Schumpeter. With an introduction by Richard Swedberg Evolutionary Economics, David Hamilton. With a new introduction by the author The Future of Economics, Edited by Alexander J. Field. With a new introduction by the editor Institutional Economics, John Commons. With an introduction by Malcolm Rutherford Inventors and Moneymakers, Frank W. Taussig. With an introduction by Warren J. Samuels Legal Foundations of Capitalism, John R. Commons. With a new introduction by Jeff E . Biddle and Warren J. Samuels Main Currents in Modern Economics, Ben Seligman. With an introduction by E . Ray Canterbery Methodology of Economic Thought, Edited by Marc R. Tool and Warren J. Samuels Philosophy and Political Economy, James Bonar. With an introduction by Warran J. Samuels Political Elements in Development of Economic Theory, Gunnar Myrdal. With an introduction by Richard Swedberg Production and Distribution Theories, George J. Stigler. With a new introduction by Douglas Irwin State, Society, and Corporation Power Edited by Marc R. Tool and Warren J. Samuels
LEGAL FOUNDATIONS OF CAPITALISM J O H N R. C O M M O N S With a new introduction by JeffE. Biddle & Warren J. Samuels
¡3 Routledge j j j ^ ^ Taylor & Francis Group LONDON AND NEW YORK
CONTENTS INTRODUCTION TO THE TRANSACTION EDITION PREFACE
MECHANISM, SCARCITY, WORKING RULES
CHAPTER I I .
PROPERTY, LIBERTY AND VALUE
PHYSICAL, ECONOMIC, AND MORAL POWER
CHAPTER V I .
THE RENT BARGAIN—FEUDALISM AND USE-VALUE
CHAPTER V I I .
THE PRICE BARGAIN—CAPITALISM AND EXCHANGE-VALUE
CHAPTER V I I I . THE WAGE BARGAIN—INDUSTRIALISM
CHAPTER I X .
INTRODUCTION TO THE TRANSACTION EDITION I John R. Commons was born in Hollandsburg, Ohio in 1862 and died in 1945. Religion was an important element in Commons's up bringing. The Calvinist faith of his mother, who appears to have been the more influential parent, included the sort of theologically inspired enthusiasm for social reform that later found expression in the Social Gospel movement. Commons, at least as a young adult, lived out his mother's principles, becoming active first as a student and later as a faculty member in various religiously inspired social reform organi zations. In the 1890s Commons joined with other prominent Ameri can economists such as Richard T. Ely and J. B. Clark in arguing that successful amelioration of social problems would require a partner ship between social scientists and the Christian clergy. Commons's views on this matter are found in his 1894 book Social Reform and the Church. Explicit discussions of Christian doctrine and the social role of the Christian church would disappear from Commons's writ ings after the early 1900s, but he never lost his commitment to reform. Commons differs from most well-known economists in that the story of his education is not one of academic accolades and outstanding achieve ment. After completing high school he attended Oberlin College, where he failed courses and suffered a nervous breakdown, barely managing to graduate. His troubles stemmed in part from an inability to adapt to the standard methods of instruction of the day, which stressed memorization of material laid out in lectures and approved textbooks. Commons's au tobiography includes an account of his experience studying biology at Oberlin. While other students were examining a series of specimens ac cording to a prescribed regimen, Commons devoted his time to analyz ing a water bug he had found in a ditch by the road. He ultimately failed his biology exam, but passed the course anyway, presumably as a re ward for his "stubborn curiosity." In spite of Commons's marginal performance at Oberlin, the in tervention of one of his professors allowed Commons to attend gradu1
LEGAL FOUNDATIONS OF CAPITALISM
ate school. Commons enrolled in Johns Hopkins University in order to study economics under Richard T. Ely, whose sympathetic writ ings on labor unions had been brought to Commons's attention. Ely's empirical, interdisciplinary style of teaching Political Economy and his habit of involving students in fieldwork projects were well suited to Commons's interests and aptitudes, and Commons made a posi tive impression on Ely. His academic troubles continued in other courses, however, and he was never able to complete his Ph.D. Between 1890 and 1899 Commons held teaching positions at four institutions, three of which he left involuntarily. His inability to de velop a teaching style that satisfied both his students and his employ ers contributed to Commons's professional difficulties, but more important was the fact that his writings and his continuing involve ment with various reform efforts were earning him a reputation as a radical. One noteworthy episode was Commons's debate with Ameri can Economic Association President A. T. Hadley, carried on during the association's 1898 and 1899 meetings. In his presidential address Hadley asserted that the economist interested in practical affairs could best serve society by assuming the role of objective, impartial advi sor to the government. Commons responded that class struggle had historically been the motor of social progress, and that the economist was most likely to aid this progress through an open advocacy of the claims of subordinate classes. After being fired from Syracuse University in 1899 Commons spent five years as a journeyman economist of sorts, working as a concili ator of labor disputes and an investigator for various private and gov ernmental agencies. These were important years for Commons. His assignments allowed him to view firsthand the actions and attitudes of businessmen, labor leaders, rank and file workers, and political operatives; they also enabled him to hone his abilities as an observer, chronicler, and interpreter of actual economic activity. It was also during this period that he began to write extensively on the topic of labor organizations and labor problems. In 1904, Ely, now chairman of the economics department at the University of Wisconsin, offered Commons a teaching job. Com mons accepted, and at Wisconsin finally found a congenial working environment. He remained there until his retirement in 1932, com piling an impressive record as a teacher, researcher, reformer, and public servant.
INTRODUCTION TO THE TRANSACTION EDITION
Ely brought Commons to Wisconsin in part so that Commons could put together a book on the history of the American labor movement using materials Ely had collected. Commons did this and more. Work ing over a period of several years with the help of graduate students, he augmented Ely's collection of primary sources with archival ma terial gathered from all over the country, arranging and publishing it in 1910 in the eleven volume Documentary History of American In dustrial Society. These materials also formed the basis for The His tory of the Labor Movement, the first two volumes of which appeared in 1918, the last two in 1935. Commons acted as editor of the latter work, with individual chapters being written by his students. By the time the first volumes of The History of the Labor Movement ap peared, Commons's writings on unions and on the problems faced by working people had already gained him national recognition as an authority on labor issues. He had been chosen by the President in 1913 to serve on a national commission investigating the causes of labor unrest, and in 1917 had been elected President of the American Economic Association. The four volume History of the Labor Move ment, however, secured his reputation for the future as the basis of what came to be known as "the Wisconsin school" of American la bor history. In spite of his earlier problems as a teacher Commons also earned the respect of his students at Wisconsin. He perfected a teaching style that drew students into whatever projects he was working on. Under graduates would do investigatory fieldwork and write reports, while graduate students might take over parts of a Commons research project (as in the case of the labor history volumes), or find themselves serv ing as staff members of a commission set up by Commons-designed legislation (to be discussed below). Some Commons students, in cluding Edwin Witte and Selig Perlman, remained in academics and rose to prominence within the community of research economists. The general pattern, however, was for Commons's graduate students, inspired by the example and aided by the connections of their teacher, to write dissertations on empirical rather than theoretical topics, and to take jobs in public service rather than academics. The fact that a larger share of Commons's students did not move into academic po sitions may be one reason for the failure of Commons's theoretical ideas to have an important impact on the subsequent development of mainstream economics.
L E G A L FOUNDATIONS O F CAPITALISM
Commons's passion for social reform, which had led to problems earlier in his academic career, found a positive outlet at Wisconsin. Shortly after arriving there Commons allied himself with Wisconsin Governor (later Senator) Robert La Follette, who had adopted the strategy of using University of Wisconsin faculty to render concrete, and lend legitimacy to, his broad ideas for reform. In 1905, Com mons helped La Follette in drafting a civil service reform law, but a more important effort began in 1907 when La Follette asked Com mons to take part in designing a law to deal with public utilities. The result was the creation of a state commission to regulate privately owned water and power companies. The commission had the author ity to set rates and levels of service subject to judicial review, and employed a large staff of expert investigators to assist it in its tasks. This approach to public utility regulation became a model adopted by almost every state in the union. Commons also played an important role in the establishment of industrial accident compensation laws in the United States, helping to forge the "historic bargain" through which employers accepted full liability for work-related injuries to employees in exchange for statutory limits on the compensation owed by employers to injured employees. Commons's role in this movement was twofold. Starting in 1906 Commons worked through the American Association of La bor Legislation (which he helped to found) to raise public awareness of the problem of industrial accidents, disseminate information about the problem, and propose solutions to sympathetic policymakers and reformers throughout the United States. Working in Wisconsin, he helped draft a workers' compensation law and establish the Wiscon sin Industrial Commission in 1911 to formulate and enforce stan dards for workplace safety. Commons served for several years on that commission, and once again the Wisconsin legislation became a model for legislation nationwide. During the 1920s, Commons turned his attention increasingly to the problem of unemployment, approaching it from two angles. First, Commons believed that workers could be provided with insurance against income loss due to unemployment in much the same way as they were now insured against loss resulting from industrial acci dents. The recession of 1920 spurred Commons to formulate a model unemployment compensation law. For the next fifteen years he pro moted his plan through his own writings, through the efforts of former
INTRODUCTION TO THE TRANSACTION EDITION
students who had achieved positions of authority, and through the machinery of the American Association of Labor Legislation. In 1932, prompted by the Great Depression, Wisconsin passed an unemploy ment compensation law; and in 1935, federal legislation led to the establishment of unemployment compensation programs in every state. The programs differed in many ways from the original model proposed by Commons, but they captured one of its key features: they were financed by experience-rated taxes, giving employers an incentive to avoid laying off workers. Commons also hoped to attack unemployment at its source. Be lieving that stabilization of the price level would contribute to macroeconomic stability and thus diminish cyclical unemploy ment, he joined with Irving Fisher and other economists in sup port of a federal legislation that would make the stabilization of the price level the prime goal of U.S. monetary policy. Although the bill did not pass, Commons is believed to have been the first economist to explain the relationship between the monetary authority's activities in the secondary bond market (i.e., Federal Reserve open market activities) and the money supply, which he did in testimony before Congress in 1927. II Commons is today remembered as one of the major figures of the heterodox institutionalist school of economics. Although the use of the word "institutionalism" to label a school of economic thought was first proposed in 1918, the institutionalist movement in Ameri can economic thought arguably has its origins in the last decades of the nineteenth century. The movement reflected the influence of Spencerian and particularly Darwinian notions of evolution on all facets of American intellectual life, as well as the influence of Ger man historicism on American economics, transmitted in part through the German graduate training received by many young American economists during this period. German-trained economists such as Ely are recognized as forerunners of the movement, but it has be come traditional to identify Thorstein Veblen as the "first" institu tionalist. In a series of essays published around the turn of the century, Veblen criticized the orthodox (classical and neoclassical) approaches to economics and described an alternative "evolutionary" approach to the science. Around the same time, he produced two influential 2
LEGAL FOUNDATIONS OF CAPITALISM books, The Theory of the Leisure Class and The Theory of Business Enterprise, which presumably embodied this evolutionary approach. By the 1910s and 1920s, numerous other writers were picking up and developing themes that could be found in Veblen's work: the fruitfulness of the evolutionary metaphor in the analysis of socioeco nomic development; the holistic nature of social phenomena and the associated need for a unified or interdisciplinary approach to study ing social and economic questions; the sterility o f static, nonevolutionary approaches to studying economics and of classical and neoclassical economics in particular; the role of classical and neoclassical economics as ideology in support of status quo power arrangements; and the importance of empirical/inductivist as opposed to a priori/deductivist approaches to the development and/or verifi cation of economic theory. Of course, these themes could be identi fied in the works of other nineteenth century social scientists, and not all of those in the next generation who sounded them were ex plicitly following Veblen. Still, because of its high visibility, its pro vocative tone, and its intellectual depth, Veblen's work became a touchstone for a generation of dissident American economists. Institutionalism in the twentieth century also came to be associ ated with "interventionism" or "national planning," as various institutionalist writers proposed specific governmental actions to be taken in response to various socioeconomic problems, or argued more gen erally that the government could assume responsibility for the intel ligent guidance of social evolution. At the same time, they challenged the way of thinking underlying such dichotomies as laissez-faire ver sus interventionism, arguing that all economic arrangements, even those idealized arrangements associated by orthodox economists with laissez-faire, inevitably involved certain patterns of state action and state control of the behavior of economic actors. Commons's lifelong interest in the social and economic problems faced by workers, his empirical research style, and his involvement designing and promoting reform-oriented legislation would all iden tify him as an institutionalist. But the work that established him as a leading theoretician of the institutionalist movement was not begun until late in his life. Prior to the turn of the century Commons had formulated a theory of socioeconomic evolution, laid out most clearly in a series of articles published in 1899 and 1900 and entitled "A Sociological View of Sovereignty." His involvement in public af-
INTRODUCTION TO THE TRANSACTION EDITION
fairs and other experiences during the subsequent years led him to refine both the theory embodied in those essays and his views on the philosophical underpinnings of, and research methods appropriate to, social science. Around 1920, Commons began drafting chapters of a manuscript treating, in his words, "an evolutionary and behavioristic, or rather volitional, theory of value" (The Legal Founda tions of Capitalism, p. iii). The manuscript ultimately included, among other things, discussions of the methodology of social science, the ontology of social processes, and the social psychology of human action; a theory of social evolution; a constructive critique of past and present schools of economic thought; and an account of effec tive strategies for economic policy reform. On the advice of his friend and fellow economist Wesley Mitchell, Commons split the manuscript into two parts. The first was The Le gal Foundations of Capitalism, published in 1924. The second grew into Institutional Economics, published in 1934. The common ori gin of these two works is reflected in the fact that many of the major analytical themes introduced in The Legal Foundations of Capital ism are fleshed out and elaborated upon in Institutional Economics, and an understanding of Commons's theoretical system really requires a careful reading of both. A final theoretical work, The Economics of Collective Action, was published posthumously in 1950. These three books laid the foundation for "Wisconsin-style" institutionalism, today recognized as a distinct stream within the larger institutionalist movement. At a theoretical level it focuses mainly on the joint evolution of and interaction between legal and economic processes. It is also a distinctively pragmatic, "applied" form of institutionalism, with an emphasis on identifying and crafting solutions to particular social problems as they emerge. Empirical observation is seen to have a major role to play in the formulation and refinement of theory; case study and fieldwork approaches are valued. Finally, Wisconsin institutionalism tends to be less critical of mainstream economics—mainstream and institu tional approaches are regarded as complementary, and advocates of the former are to be faulted mainly for their failure to recognize the limita tions inherent in their methods. 4
Ill From the time of their appearance Commons's later theoretical works, including Legal Foundations, have induced frustration on the
LEGAL FOUNDATIONS OF CAPITALISM
part of many readers. On the first page of Institutional Economics Commons acknowledges "the comments and criticisms by readers and students of both my Legal Foundations of Capitalism and the various revisions and mimeographed copies of this book on Institu tional Economics, to the effect that they could not understand my theories nor what I was driving at, and that my theories were so per sonal to myself that perhaps nobody could understand them." A l though the books are laid out in a highly structured outline form, it is not always clear to the reader why topics have been ordered as they have or even included in the first place. Familiar figures and themes such as Adam Smith or the problem of scarcity are given idiosyn cratic treatments in unfamiliar contexts. Commons's frequent classi fication and reclassification of factors under discussion seems at times distracting and unnecessary, and his tendency to neologize often adds to the confusion. The difficulties readers have with these works spring in part from poor exposition, and in part from the fact that Commons, in attempt ing to synthesize insights from many disciplines (especially law and economics), was adopting and adapting the esoteric vocabularies and definitions of each. But another reason that the style and structure of Legal Foundations and later works seem strange to readers is that over several decades of observing and participating in economic ac tivity and the making of economic policy, Commons formulated a philosophical and methodological outlook quite different from that subscribed to by mainstream economists of his day and today. Once this outlook is appreciated, many of the initially puzzling aspects of Commons's theoretical works come to make more sense. Commons's philosophical views and psychological assumptions are closely related to those of the American pragmatist philosophers C. S. Peirce, William James, and John Dewey. Commons, like these philosophers, conceived of human activity as an ongoing attempt to control or influence the course of future events. The meaning or value of an action for an individual lay in his expectations of its future consequences. Expectations were formed on the basis of past experi ences, and what constituted a desirable consequence depended on the purposes or goals of the actor, also a result of past experiences and socialization. Valuing or forecasting the consequences of an act involved comparing a present situation to past situations and recall ing patterns of action that had "worked" in similar situations in the
INTRODUCTION TO THE TRANSACTION EDITION
past. Determining which past experience(s) provided a reliable guide to present action involved choosing out of the present situation the most salient factors, and searching one's repertoire of past experi ences for those marked by similar factors—the process of weighing and classification discussed in the final chapter of Legal Founda tions. Whether or not the process was successful, and whether or not the action chosen yielded the hoped-for consequences, the experi ence and its contextual situation became part of the individual's past, and part of the stock of experience upon which meaning and expec tation would be constructed in the future. This view of human action surfaces throughout Legal Founda tions in large ways and small. It is embodied, for example, in the idea of the transaction, a concept designed to explore the implications of the fact that in most situations the key factors or consequences about which expectations must be formed are the actions of other purpose ful individuals. It provides the context for the concept of working rules, which stabilize expectations by allowing people to predict fairly confidently the reaction of others to specific actions in specific classes of transactions. But for the purposes of understanding the style and content of Legal Foundations it is important to realize that Com mons believed this account of human activity to hold good all areas of life, including social scientific investigation. Theorizing about transactions (Common's fundamental unit of social science analysis) involved searching for similarities and differences between transac tions currently under study and those studied in the past. It involved classification and labeling, that is, the grouping of transactions per ceived to be similar along important dimensions and the naming of those dimensions. The groupings and the meanings of labels were not held to be a fixed feature of the reality being studied, but tools created by the mind of the investigator and subject to change with the changing purpose of the investigator. In Legal Foundations these thought processes are often made explicit, yielding the overlapping classification schemes and neologisms referred to earlier. Significant aid in making sense of Commons's later writings has been provided by Ramstad's (1986) identification of Commons as a "holist." Commons's holism involves thinking in terms of part-whole relationships, of which he writes frequently. From the standpoint of research practice, Commons's holism implies the use of a case-study method: individual cases (parts) are examined in search of general 5
LEGAL FOUNDATIONS OF CAPITALISM
themes or shared principles that characterize the system or class of cases from which they arise (the whole), with a belief that a study of general themes or shared principles and their interrelationships will bring a clearer understanding of each individual case. At a deeper level, Commons believed that objects and processes of interest (such as transactions or going concerns) existed and could be perceived as both wholes made up of integrated parts and as parts interacting with one another within larger wholes. How they were perceived in any particular instance depended in part on the purposes, preconceptions, and situation of the observer. The full meaning and significance of an entity lay in the complex totality of part-whole relationships and interactions in which it could be involved. The meaning of an entity that arose from a single instance of perception, however, was a par tial meaning, a context-dependent meaning, a meaning in which cer tain of the potential part-whole relationships were emphasized while others were obscured or ignored. Greater understanding of an entity was achieved when it was encountered or considered in a variety of contexts. An expositional consequence of adopting the holistic view is an apparent repetitiveness and fuzziness i n conceptualization. I n Commons's system fundamental elements of economic life—scar city, futurity, the going concern, and so forth—will, because they are fundamental, appear together or separately in a variety of different contexts. To convey more fully the meaning of an element of the system, Commons calls attention to its position and significance in these different contexts. Each time a new element is discussed, defi nitions of previously discussed elements might be recast and elabo rated upon in light of their potential part-whole relationships with the new element. The expositional style reflects a belief that a full understanding of each element emerges only after all have been dis cussed and the possible relationships between them enumerated. 7
IV Understanding why Commons adopted an unusual expositional style unfortunately does not remove all the barriers that style might place in the way of a modern reader of The Legal Foundations of Capitalism. Further, there is considerable truth in Ramstad's (1986) assertion that, as a result of Commons's holism, acquiring a reason ably firm grasp on Commons's framework requires one to read and
INTRODUCTION TO THE TRANSACTION EDITION
reread his major works. With each reading the whole system becomes more clear, allowing a greater comprehension of its various elements during the next reading, and so on. Only with time does the remark able unity in the system become apparent. Notwithstanding this, The Legal Foundations of Capitalism stands on its own in many ways, and can still be read with profit. For in addition to including a partial exposition of Commons's conceptual framework and methodological views, which was to be expanded later in Institutional Economics, it presents the fruits of Commons's application of his framework and investigative methods to a number of interesting and related questions. Some of the questions arise in connection with public policy is sues and controversies current in Commons's day, and this is not surprising. Commons viewed himself as a "constructive researcher," one whose work was intended to be of use in solving social prob lems. He claimed to have built his system out of his own experi ences, many of which were in controversial areas of economic and social policy, and to be developing concepts that would serve as tools for other constructive researchers. And, apropos of the earlier dis cussion of Commons's methodological views, a detailed analysis of current controversies was seen by Commons as an appropriate way of developing a greater understanding of larger theoretical themes. So, in Chapter I I I , an account of the evolution through judicial decision of the definitions of power and coercion culminates in a defense of the constitutionality of minimum wage and maximum hours statutes, an issue still unsettled in the United States in the mid1920s. Chapter V includes detailed analyses and criticism of a num ber of now largely forgotten court decisions dealing with issues of tax assessment and public utility valuation and regulation. In Chap ter IX, Commons reviews and contributes to the early twentieth-cen tury debates over the meaning of the equal protection and due process clauses of the United States Constitution. The material in Legal Foundations probably considered most con troversial from a public policy standpoint in the mid-1920s is found in Chapter V I I I . Here Commons recounts changing legal concep tions of the labor contract, and criticizes the conceptualization of the labor contract embodied in recent court decisions. He makes clear the practical consequences of decisions in this area: they determine which tactics labor unions are permitted to use in their attempts to 8
LEGAL FOUNDATIONS OF CAPITALISM
organize workers and engage in collective bargaining, and which tac tics employers are permitted to use in resisting unions. Many of these issues would be resolved in the 1930s in a manner consistent with Commons's reasoning, but in 1924 Commons's advocacy of the claims of organized labor was at odds with existing policy and, per haps, with the views of the majority of economists. In one sense, the historic account of legal-economic evolution found in Legal Foundations can be seen as a basis from which to argue that workers, through their unions, should be allowed greater participation in the governing process, that public policy should come to embody and be influenced by the values and viewpoints growing up among the working classes. The absorption of labor into the de facto governing coalition through a gradual change in the "working rules" of the state (that is, through the redesign of legal structures and redefinition of legal concepts) would parallel the previous ab sorption of first the landowning aristocracy and later the capitalist class into the ruling classes of England. But Legal Foundations should not be considered simply a tract for the times, for Commons's references to contemporary issues are embedded in discussions of larger themes that contain insights into, and sometimes detailed treatments of, some of the deep and timeless questions of social theory. In the tradition of Adam Smith and Karl Marx and more or less contemporaneously with Max Weber and Vilfredo Pareto, Commons attempted an architectonic, synthetic, and synoptic theory of the economic system broadly understood. He did so in a manner that sometimes parallels the theories of these other writers—for example, in the handling of questions of power—but which, in both its reliance on English and U.S. legal history and its overall focus on the legal-economic nexus, is largely sui generis. In deed, in Legal Foundations Commons attempted no less than an ex planation of the major processes and elements of the evolution of the economic system as it underwent transformation from feudalism, or postfeudalism, to capitalism. The explanation centers on the joint evolution of polity and economy, or more accurately, of the nexus of legal-economic processes from which emanate what are perceived as the economy and the polity. Commons analyzes socioeconomic development using what he called an "artificial selection" theory of institutional evolution. Each institution, or customary pattern of behavior, originates in the ere-
INTRODUCTION TO THE TRANSACTION EDITION
ative attempts by individuals to advance their purposes as they inter act with one another. For a social institution to emerge and persist, a particular pattern of interaction (transaction) must prove successful enough in advancing some commonly held purposes to be widely imitated. Further, it must meet with the approval of those who, under the existing scheme of working rules, possess the power to permit or forbid the pattern of action. Commons's description of the emergence of institutions thus denies the familiar dichotomy between institu tions that arise from spontaneous order and those that are a product of conscious design. Every institution reflects both the spontaneous action of individuals pursuing their goals and the conscious attempts of those with authority to encourage or squelch variants of transac tional behavior in order to advance their notions of the social or pub lic purpose. In Legal Foundations Commons is particularly interested in the processes through which a succession of capitalistic market forms developed as the state, acting mainly through the courts, endorsed and protected some forms of economic interaction while prohibiting others. For Commons, markets are not merely abstract conceptions in which the workings of the pure price mechanism can be analyzed. Markets in the real world are a function of the institutions or power structure that form and operate through them. More particularly, they are a function of the legal rights generated by and through govern ment as conflicting interests seek advancement of their opportuni ties. Commons thus produces a theory of the legal foundations of capitalism, which is also a theory of the economic foundations of law and government, but not in the narrow neoclassical conception of "economic." In the analysis Commons formulates and makes use of number of different theories and models: a model of interpersonal relations speci fied in quasi-legal terms, such as rights, duties, exposures, and im munities; a behavioristic theory of psychology; theories of social control and social change; a theory of language and its role in the social construction of reality; theories of system and institutional or ganization, especially of property, markets, governments, and busi ness firms; a theory of power structure and a correlative theory of legal-economic conflict resolution; and so on. Commons directly contradicts the conventional juxtapositions of interventionism and noninterventionism (laissez-faire) and of meth9
LEGAL FOUNDATIONS OF CAPITALISM
odological individualism and methodological collectivism. Against the former, Commons argues that it is not possible to meaningfully comprehend the economy in non- or apolitical terms. The economy is fundamentally what it is because of the uses to which the modern state is put, and those uses are the result of conflict resolution among actors and groups that are largely economic in character. Govern ment is both fundamental and important to the economic system. Against the latter, Commons argues at least two points: first, that law is important in determining which individuals' interests will be pro tected by government as rights; and second, that individuals operate only within larger social structures and processes in which govern ment and other social control forces operate. Against both, Commons argues that there is no escape from some conception of social or pub lic purpose in choosing between conflicting interests and claims. I f one accepts Commons's theory, then most conventional arguments about the economic role of government are either naive or disingenu ous, in either case functioning to channel the use of government even when government is explicitly denigrated and minimized. Unlike the neoclassical economist, Commons is not directly inter ested in the theory of value as an explanation of commodity prices. Instead, he is interested in the way in which the values of various groups within society come to be ensconced in the working rules that govern the actions individuals can take under various circumstances. The relative prices of commodities and labor are derivative of these. He defines as "reasonable values" the values embodied in working rules that emerge through the total societal decision-making process, within which the courts and the Supreme Court in particular play a crucial role. His fundamental point is that with changes in ideas of what constituted reasonable behavior came changes in working rules, and as the working rules changed, capitalism both emerged and evolved. V Commons proceeds in a number of steps. Several broad themes are announced in Chapter I . Various aspects of them are elaborated in Chapters I I and III. In Chapters I V and V, Commons develops further those themes in examining the transaction and going con cerns, respectively. He therein spells out the theoretical apparatus to be used in Chapters V I , V I I , and V I I I , which constitute his specifica-
INTRODUCTION TO THE TRANSACTION EDITION
tion of the historical legal foundations of capitalism. In the conclud ing chapter, Commons focuses on the role of changing determina tions of public purpose in the evolution of the working rules that determine the economic system. In Chapter I , Commons argues that psychology, ethics, juris prudence, property, and politics are all fundamentally operative— as both dependent and independent variables—in the social construction of the economy and thereby the relations among in dividuals and subgroups. He outlines his volitional theory of psy chology, emphasizing that action and value i n the present are functions of expectations of the future. He describes the role of working rules, the transaction as the proper unit of analysis, and the formation and operation of going concerns. He urges that col lective decisions, ultimately those of the courts, have to be made as to what constitutes "good or bad economy," that these deci sions are embodied in working rules, and that these working rules proportion activities, conduct, and resources among individuals. A principal focus is on the changing nature of property as recog nized by the courts. The original physical conception of property, he insists, has become transformed to include concepts of intan gible and incorporeal property. The working rules of evolving property enlarged the field of individual action in some direc tions, limited it in others. Accordingly, the theories of property, liberty, and value embraced by the courts, sometimes erected into metaphysical and ontological absolutes, serve as the basis for the formulation and reformulation of rights, duties, and so on. Chapter I I presents certain fundamental arguments regarding the changing legal definitions of property and liberty. Commons identi fies the transformation from a use-value to an exchange-value con ception of property as critical to the formation of capitalism, and he attributes the social construction of capitalism through that transfor mation to the operation of the courts. The change in the nature of liberty is examined in part in terms of opportunity, power, and for bearance in the context of a broad model of interpersonal relations. Many of these substantive changes, he argues, took place without overt or explicit change in legal terminology. The discussion empha sizes the complexity and malleability of concepts such as power, lib erty, and opportunity, and the fallacy of treating particular specifications of them as absolutes—natural and antecedent to and
LEGAL FOUNDATIONS OF CAPITALISM
independent of government—usually in order to give them a selec tive and privileged status. Commons also explores complex human relationships and how they are structured by property and law. An individual's liberties and rights are shown to be relative to both the law and the rights of others, and to be created and recreated through the ongoing determination of which/whose opportunities are legal and not legal. As these deter minations are made certain interests are given the status of property, thereby privileging some specifications of property rather than others. Chapter I I I further explores the transformations of legal concepts and the creation and growth of markets. Commons identifies the trans formations and inversions of legal concepts as legal privileges for the aristocracy under the Magna Carta were later interpreted, selec tively, into common rights, and as the prerogatives of the monarch became constrained during the rise of republican, or representative, government. He points to a double meaning of liberty: liberty as the privileges of landlords and monopolists granted by the monarch, and liberty to buy and sell. Freedom to buy and sell in the market grew out of this common legal history and constituted part of the legal foundations of capitalism. But it also represented one stage both in the dualism of private rights and government action discussed in Chapter I I and the tension between maintenance of existing law and rights and legal change of law and rights. The conceptual structure is exceedingly complex. Physical power is juxtaposed to economic power. The old prerogative power of the monarch is juxtaposed to the police power of the legislature. Prop erty changes "from a concept of holding things for one's own use to withholding things from others' use, protected, in either case by the physical power of the sovereign" (p. 52). Rights are the interests to which government gives its protection when in conflict with other interests. When the courts transformed the meaning of property into exchange-value, in order to protect property against legislative con trol of private coercive power, they were willy-nilly protecting cer tain interests and not others; in each case the interest was recognized as property over against what was not so recognized, the language and legal theory of the courts notwithstanding. In the former system, holding and use meant "a merely passive choice between social op portunities" (economy); in the new, the exercise of power in search of enlargement (expansion) (p. 55). Apropos of coercion he estab-