Monday, August 18, 2008

The Federalists' Error: National Size and the Evolution of Faction: Progressivism's Hamiltonian Root

Montesquieu had argued that only small republics are possible, but Madison and Hamilton argued the reverse. Their claim was that small republics lead to conflict among factions, but that large size reduces factional conflict. In the Federalist No. 10 Madison argues:

"The question resulting is whether small or extensive republics are most favorable to the election of proper guardians of the public weal; and it is clearly decided in favor of the latter by two obvious considerations..."

The first, in Madison's view, is that because there is a greater absolute number of capable representatives in a large than in a small republic but because legislatures are limited in size, "the number of representatives in the two cases not being in proportion to that of the constituents, and being proportionally greatest in the samll republic, it follows that if the proportion of fit characters be not less in the large than in the small republic the former will present a greater option and consequently a greater possibility of a fit choice."

Also, in Madison's view, "as each representative will be chosen by a greater number of citizens in the large than in the small republic, it will be more difficult for unworthy candidates to practise with success the vicious arts by which elections are too often carried; and the suffrages of the people being more free, will be more likely to center on men who possess the most attractive merit and the most diffusive nad established characters."

However, Madison tempers his argument in the next paragraph by noting that "by enlarging too much the number of electors, you render the representative too little acquainted with all their local by reducing it too much you render him unduly attached to these, and too little fit to comprehend and pursue great and national objects.."

The second factor favoring large scale or size, in Madison's view is "the greater number of citizens and extent of territory which may be brought within the compass of republican than of democratic government; and it is this circumstance principally which renders factious combinations less to be dreaded in the former than in the latter. The smaller the society, the fewer probably will be the distinct parties and interests composing it; the fewer the distinct parties and interest, the more frequently will a majority be found of the same party; and the smaller the number of individuals composing a majority, and the smaller the compass within which they are placed, the more easily they will concert and execute their plans of oppression. Extend the sphere and you take in a greater variety of parties and interests; you make it less probable that a majority of the whole will have a common motive to invade the rights of other citizens."

In the Federalist No. 27, Hamilton argues:

"Unless we presume at the same time that the powers of the general government will be worse administered than those of the State governments, there seems to be no room for the presumption of ill will, disaffection or opposition in the people. I believe it may be laid down as a general rule that their confidence in and obedience to a government will commonly be proportioned to the goodness or badness of its administration. ..the general government will be better administered than the particular governments: the principal of which are that the extension of the spheres of election will present a greater option, or latitude of choice, to the people...And that on account of the extent of the country from which those, to whose direction they will be committed, will be drawn, they will be less apt to be tainted by the spirit of faction, and more out of the reach of those occasional ill humors or temporary prejudices and propensities which in smaller societies frequently contaminate the public deliberations, beget injustice and oppression of a part of the community, and engender schemes which, though they gratify a momentary inclination or desire, terminate in general distress, dissatisfaction and disgust."

First, notice that Hamilton's argument in favor of the expertise of the federal government is precisely the one used by the Progressives from the 1890s through the 1930s in arguing for enhancement of federal power. Hamilton argued that central government would be more rational, and the Progressives argued that centrally placed experts would be able to administer anti-trust and other regulatory systems more rationally.

Naturally, the federalist system works much better than the Anti-Federalists of the 1780s feared. However, it is also true that as the Progressives' centralizing strategy of enhancing the federal government has developed, faction has played an increasing role. Not necessarily the kind of faction about which the Federalists and the Progressives through Herbert Hoover were often concerned such as agricultural versus manufacturing interests, or labor versus management, i.e., broad social groupings, but rather special interests.

Mancur Olson* posed the argument that small rather than large factions or groups are effective in the regulatory process. Large size stimulates special interest involvement in the legal and regulatory process to the benefit of small factions. The is counter-intuitive, and Hamilton and Madison did not have the advantage of as much historical evidence as Olson had. The reason is that as the scope of the republic gets larger, the benefit from special interest lobbying also gets larger. The larger the benefit, the greater the incentive for specific firms and industries to form factions and lobby. Larger size reduces the cost per citizen of rent extraction. Large size makes the formulation for scattered and poorly coordinated factions difficult, but corporations are compact. Corporations did not exist in the Federalist era. Thus, history revealed the opposite trend: the centralization of power in the Federalist era led to special interest factions having greater power than they had in the more decentralized nineteenth century. Of course, the corporate form of organization, which flowered in the late nineteenth century contributed to this, but so did the Progressives emphasis on expertise in a centrally situated state. The economic incentives are powerful enough that special interests are able to overcome the best efforts (if there are indeed such efforts) of centrally placed experts. Moreover, the factions are able to employ experts that are superior to the government's resulting in all too fequent cases of regulatory capture by corporations.

Decentralizing the economy would reduce the incentives for lobbying and raise the costs of lobbying. As a result, the advantage that corporations and small groups that face high benefits from lobbying gain in a more centralized federal system is likely to be reversed. First, the benefit will be on average 1/50th the size it currently is for each lobbying episode. Second, the costs of lobbying will be 50 times greater because there are 50 states. Clearly, lobbying will become more expensive and more complex, making regulatory influence more difficult.

Although Hamilton and Madison may have been right in the environment in which they lived, where there were no large corporations, where the entire US population was less than four million and where benefits from lobbying were negligible by today's standards, in today's world lobbying functions like a competitive auction. To the extent that it interferes with democracy, raising the transaction costs of lobbying and reducing the benefit from each lobbying episode will enhance democracy and limit the private gains at public expense that lobbyists can accrue.

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