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 circumstances...as 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.

Hamilton on the Limits of Decentralization

Federalism has always meant a partnership among the states and between the states and the federal government. Just as there are certain public goods that are indivisible so that individuals cannot purchase them and so devolve upon government, so there are federal goods that the states cannot divide and pay for individually and so must devolve upon the federal government. Defense and foreign policy are indivisible not only among individuals but also among the states. In an economy with an enhanced level of decentralization as existed in the late 18th and 19th centuries it is beneficial for defense and foreign policy to be handled by the federal government. In the Federalist Papers No. 25 Hamilton wrote this:


"It happens that some States, from local situation, are more directly exposed. New York is of this class. Upon the plan of separate provisions (of defense), New York would have to sustain the whole weight of the establishments requisite to her immediate safety, and to the mediate or ultimate protection of her neighbors. This would neither be equitable as it respected New York, nor safe as it respected the other States. Various inconveniences would attend such a system. The States, to whose lot it might fall to support the necessary establishments, would be as little able as willing for a considerable time to come to bear the burden of competent provisions. The security of all would thus be subjected to the parsimony, improvidence or inability of a part. If the resources of such part becoming more abundant and extensive, its provisions should be proportionally enlarged, the other States would quickly take the alarm at seeing the whole military force of the Union in the hands of two or three of its members...Reasons have been already given to induce a supposition that the State governments will too naturally be prone to a rivalship with that of the Union, the foundation of which will be the love of power; and that in any contest between the federal head and one of its members, the people will be most apt to unite with their local government..."

Thinking of subsequent events, the Civil War and 9/11 for instance, Hamilton's vision was accurate, not just about federalism but about New York as well.

The Federalist Number 8 and the Second Amendment

The Federalist No. 8, attributed to Hamilton, sheds some light on the Second Amendment debate. As many have pointed out, the Second Amendment refers to the citizens' and the states' ability to resist a federal standing army. As such, it would seem that a robust interpretation as to the right to keep and bear arms is condign. In the Federalist Number 8 Hamilton argues that the threat of a standing army to liberty will not be great since the country, under the Constitution, would not ordinarily need to worry about military threats and so the federal army would not need to be large. He adds that because of the rarity of internal invasions:

"The smallness of the army renders the natural strength of the community an overmatch for it; and the citizens not habituated to look up to the military power for protection, or to submit to its oppressions, neither love nor fear the soldiery; they view them with a spirit of jealous acquiescence in a necessary evil and stand ready to resist a power which they suppose may be exerted to the prejudice of their rights.

"The army under such circumstances may usefully aid the magistrate to suppress a small faction, or an occasional mob, or insurrection; but it will be unable to enforce encroachments against the united efforts of the great body of people."

The Second Amendment reads:

"A well regulated militia, being necessary to the security of a free state, the right of the people to keep and bear arms shall not be infringed."

It seems evident that the Second Amendment, like Hamilton, refers to the public's and the states' ability to resist military incursions on liberty. Gun ownership in this light is not only an individual right, but an individual responsibility. Far from limiting the right to bear arms, the phrase "a well regulated militia" suggests that all Americans ought to bear arms as a defense against a standing army and suppression of the citizenry. Would that the European victims of nazism and communism had taken the advice of the Bill of Rights and formed a well-regulated militia.

Publius on Localization of America

Let's do a thought experiment. Let's say the federal government agreed to download most of its responsibilities, such as social security, taxation, education (oh, I thought that was a state responsibility), medical care for the elderly, regulation of labor and industry and similar responsibilities onto the states. The states would have the power to reform or discard any or all of the progressive, New Deal and Great Society bureaucracies.

Continuing the thought experiment, under such a localization policy, some states might opt for greater freedom of enterprise and laissez faire. Other states might opt for subsidization of business, a central bank like the Fed, and eminent domain to subsidize real estate developers. Still other states might opt for governmental redistribution of wealth to enable the poor to contribute productively. It is likely that one of these models would be most successful. Would the successful states incur the unsuccessful states' wrath?

In the Federalist Papers number five (by Jay) and six and seven (by Hamilton) Publius, the pseudonym for Jay, Hamilton and Madison, addresses this question. Publius's argument is that decentralization will create animosity among the states or local confederacies of states. In Number 5, Publius (Jay) argues that "they ...would in no other sense be neighbors as they would be borderers." In turn, border conflicts and hatreds leading to war would evolve.

In Number Seven Publius (Hamilton) argues that:

Competition of commerce would be another fruitful source of contention. The States less favorably circumstanced would be desirous of escaping from the disadvantages of local situation, and of sharing in the advantages of their more fortunate neighbors. Each State, or separate confederacy, would pursue a system of commercial policy peculiar to itself."

States, muses Hamilton, might pass laws that justifiably benefit their own citizens, but in so doing incur the wrath of other states whose citizens are not benefited. An example might be tariffs set by coastal states like New York that expense inland states like Ohio. The result might be civil war.

The Constitution resolved the danger of warfare among the states. A decentralized system that relies on a federal government to resolve conflicts concerning interstate commerce, to set tariffs and conduct foreign policy, would be in keeping with the Constitution and permit improvement and modernization of decision making. A nation united by comparable values need not have but one bureaucracy.

It is likely that the most successful states, which I would guess would be the ones that adopted laissez faire policies, would incur the wrath of other states. But the magnificence of decentralization is that the wrath could be converted into productive action. States could learn from other states through mimesis. Thus, better and more productive methodologies would lead not to hatred and warfare, but rather to the spreading of ideas throughout the republic. Publius Wealth is not the result of resource endowment, but rather of human capital and technology. Greater diversity of experimentation from decentralization will reap benefits that far exceed the costs of multiple bureaucracies.