Development Through Wage-Led Growth
Henry C.K. Liu

Part I:    Stagnant Worker Income Leads to Overcapacity
Part II:  Gold Keeps Rising as Other Commodities Fall
Part III: Labor Markets de-linked from the Gold Market
Part IV: Central Banks and Gold
Part V:  Central Banks and Gold Liquidity
Part VI: The London Gold Market
Part VII: Weak Political Response to Ineffective Financial Regulation

Part VIII: Gold and Fiat Currencies

Part IX: International Gold Agreements- Historical Political Context
Part X: The Rise and Decline of Institutional Economics

This article appeared in AToL on Arpil 7, 2011 and on the TopWonks website 


Institutional Economics is a policy-oriented social science that seeks resolution of economic-political problems at government levels that impair the efficiency and equity of the economic system and the fair distribution of the resultant income and wealth. Institutional economists generally question the presumption of neoclassical orthodox economics that participants in the economy acting separately and competitively to maximize their own individual self interests in unregulated free markets necessarily result in the best possible common good. Among the aims of institutionalists are the development of effective normative policy analysis upon which goal-oriented government economic policy are derived and problem-solving programs are formulated and implemented to achieve policy aims.
While much intellectual roots in American thought had been sourced from European thinkers, institutional economics in the US had been developed by American economists in the US historical and political context.  Two major figure in US institutional economics are Thorstein B. Veblen (1856-1929) and John Rogers Commons (1862-1945).
The Contribution of Thorstein Veblen
A popular and witty critic of capitalism, as shown by his classic, The Theory of the Leisure Class (1899), a critique of modern consumerism, Veblen integrating a Darwinian evolutionary perspective with his new institutionalist approach to socio-economic analysis. Veblen put forth a basic distinction between the productiveness of “industry” run by skilled engineers, which manufactures real goods of utility, and the parasitism of “business”, which exists only to make profits for a leisure class which engages in “conspicuous consumption”.
The only economic contribution by the leisure class is
economic waste”, activities that contribute negatively to productivity. By implication, Veblen saw the US economy as being made inefficient and corrupt by men of “business” who deviously put themselves in an indispensable  position in society. Veblen believed that technological advances were the driving force behind cultural change, but such changes without guidance are not necessarily connected with social progress.
In The Theory of Business Enterprise (1904), published during the height of the anti-trust era in the US, Veblen employed his evolutionary analysis to explain the cause and consequence of small production enterprises created by engineers being swallowed up by business firms to provide lucrative profit opportunities for business managers and passive share holders, in a conflict between productive engineers and manipulative businessmen.
In combination with the tendencies described earlier in The Theory of the Leisure Class, Veblen saw this conflict as resulting in waste and financial “predation” that served only to enhance the social status of a leisure class which benefited from immoral predatory claims to goods and services provided by hard-working engineers.
Unlike Marx, Veblen professed little confidence in the ability of workers to manage society and government. His writings influenced the intellectual milieu of the Progressive Era, a three-decade-long period of reformist social activism beginning in the 1890s and lasting until the 1920s. 
In his book, The Engineers and the Price System (1921) Veblen envisioned that capitalism would be overthrown by engineers, not by workers as Marx predicted. Veblen believed that technological developments would eventually lead toward a socialistic organization of the economy in a Technocracy movement.
In contrast to the claim of neoclassical economics on individual self interest as the motivating energy in the market economy, Veblen saw economic behavior as socially determined and saw economic organization as a process of ongoing institutional evolution. Veblen rejected economic theories based on inner-directed individual action as “unscientific” that fail to grasp the effects of social and cultural change on economic changes.
The Contribution of John R Commons
John Rogers Commons (1862(1862-10-13) - 1945(1945-05-11)) at the University of Wisconsin–Madison developed an analysis of collective action by the state and associated institutions, which he saw as essential to understanding economics. His notion of transaction as being shaped not only by contracting parties performing what they promised, but also by the expected counter actions by actual and potential competitors, given the effective enforcement power of the legal system. It is one of the most important contributions to the development of Institutional Economics.
This institutional theory was closely related to Commons’ remarkable successes in data collection from fact-finding in the field and in drafting legislation on a wide range of social issues for the State of Wisconsin. Commons drafted legislation establishing Wisconsin’s worker's compensation program, the first of its kind in the United States.
Ironically, Wisconsin lawmakers voted on March 10, 2011 to strip nearly all collective bargaining rights from the state's public workers in one of the strongest blows to the power of unions in years. The measure set off weeks of protests at the State Capitol and sparked a walkout by Senate Democrats. It passed the state Assembly a day after the state Senate used a legislative maneuver to pass the bill without the 14 Democratic senators who fled the state in an effort to block it.
The Wisconsin Assembly passed 53-42 the explosive proposal by Republican Governor Scott Walker. The state's Senate had approved the bill the night before, after using a procedural move to bypass its AWOL (Absent Without Leave) Democrat members.
The vote brings a swift end to a standoff over union rights that has rocked Wisconsin and the nation. Tens of thousands of protesters have converged on the state's Capitol for weeks of demonstrations. The implementation of Walker's proposal will be a key victory for Republicans who have targeted unions amid efforts to slash government spending.
Governor Walker signed the highly contested bill the very next day, March 11, that takes collective bargaining rights away from most of the state's public employees. This anti-labor trend is expected to spread to other states
In 1934, Commons published Institutional Economics which laid out his view that institutions were made up of collective actions that, along with conflict of interests, defined the economy. In Commons’ view, institutional economics added collective control of individual transactions to then prevalent economic theories.  Many of his books are still widely read today:  The Distribution of Wealth. New York: Augustus M. Kelley, 1893; Industrial Goodwill. New York: McGraw Hill, 1919; Institutional Economics. New York: Macmillan, 1934; Labor and Administration. New York: Macmillan, 1913 and  Legal Foundations of Capitalism. New York: Macmillan, 1924.
Alas, Commons was unable to rise above the racial bias of his time. His book Races and Immigrants in America. New York: Macmillan, 1907, reflected the then mainstream racial prejudice in US society.
The Contribution of Henry D Macleod
Commons considered the Scottish economist Henry Dunning Macleod to be the “originator” of institutional economics. Macleod’s principal contribution to the study of economics consists of his path-setting work on the theory of credit, leading to a theory of money starting from a theory of credit instead of the usual reverse linkage.
In The Theory of Credit, Macleod writes: “Money and Credit are essentially of the same nature: Money being only the highest and most general form of Credit.” Macleod’s Credit Theory of Money influenced modern Chartalism as a descriptive economic theory which outlines the consequences of using government-issued tokens as the unit of money. The name derives from the Latin charta, in the sense of a token or ticket. (On the issue of money as credit, please see my series: Liberating Sovereign Credit for Domestic Development.)
Schumpeter on Macleod
In his magnum opus, History of Economic Analysis, Joseph Schumpeter wrote: “The English leaders from Thornton to Mill did explore the credit structure, and in doing so, made discoveries that constitute their chief contributions to monetary analysis, but could not be adequately stated in terms of the monetary theory of credit. But they failed to go through with the theoretical implications of these discoveries, that is, to build up a systematic credit theory of money...”  Then, he adds a footnote: “We might see the outlines of such a theory in the works of Macleod. But they remained so completely outside of the pale of recognized economics...” (Page 718). Then Schumpeter concludes: “Henry Dunning Macleod [...] was an economist of many merits who somehow failed to achieve recognition, or even to be taken quite seriously, owing to his inability to put his many good ideas in a professionally acceptable form.” (page 1115)
Macleod Coined the term: Gresham’s Law
According to George Selgin, monetary and banking economist and historian at the University of Georgia and a senior fellow at the conservative Cato Institute, Macleod coined in 1858 the term “Gresham's Law” which states that when government compulsorily overvalues one money and undervalues another, the undervalued money will leave the country or disappear into hoards, while the overvalued money will flood into circulation.”
Gresham’s Law is commonly stated as: “Bad money drives out good”, but is more accurately stated as: “Bad money drives out good if their exchange rate is set by law.” Nobel laureate Robert Mundell believes that Gresham’s Law could be more accurately rendered, taking care of the reverse, if it were expressed as, “Bad money drives out good if they exchange for the same price.”
In an important theoretical article, Rolnick and Weber (1986) argued that bad money would drive good money to a premium rather than driving it out of circulation. However their research did not take into account the context in which Gresham made his observation, that legal tender legislation requiring market participants to accept both good and bad money as if they were of equal value. Gresham only referred to interaction between different metallic moneys, a not to relative “goodness” of silver to that of gold. (Please see my AToL Greenspan - the Wizard of Bubbleland - Part 4: The Global Money and Currency Markets)
The experiences of dollarization in countries with weak economies and currencies (for example Israel in the 1980s, Eastern Europe and countries in the period immediately after the collapse of the Soviet bloc, or South American countries throughout the late 20th and early 21st century) may be seen as Gresham's Law operating in its reverse (Guidotti & Rodriguez, 1992), but in general the dollar had not been legal tender in those situations, and in some cases its use was even illegal.
When Money Dies
Adam Fergusson, British journalist, author and Conservative Party politician, pointed out in his 1975 book, When Money Dies, an account of hyperinflation in the Weimar Republic, Gresham’s Law began to work in reverse in Germany, since the official money became so worthless that virtually no one would accept it, and other valuable currencies fled the country. The problem became serious as farmers began to hoard food and refuses to sell it for official Weimar currency. Other currencies backed by any sorts of value became the circulating media of exchange. There were instances in recent time when hyperinflation caused similar effects, such as in 2009 in Zimbabwe. Fergusson’s book was reprinted in July 2010 after the original edition came into great demand as a result of financier Warren Buffet having praised it.
The Contribution of John K Galbraith
Another well-known institutional economist was John Kenneth Galbraith (1908 - 2006), a liberal Keynesian institutionalist at Harvard, who wrote, among many other works, an influential trilogy on economics, American Capitalism (1952), The Affluent Society (1958), and The New Industrial State (1967).  Galbraith worked in the New Deal program of the FDR administration. He argues in The Affluent Society that voters reaching for personal security of material wealth would vote against the common good. He coined the term “conventional wisdom” to refer to the orthodox ideas that underpin the resulting conservative consensus.
Galbraith observed that modern-day big business has changed the characteristics of markets previously observed by neoclassical economists in their time. Modern big business set its own terms in the marketplace via invasive advertising to generate unnatural demands for its otherwise unwanted products, so that big business could produce what was conveniently profitable for them rather than what consumers really needed. As a result, individual consumer preferences unknowingly actually reflected the preferences of entrenched corporations in a “dependence effect”, and the economy as a whole was geared to irrational goals and planned obsolescence. Consumers were forced to serve the malignant needs of the malfunctioning economic system, rather than having their needs served by a healthy economy.
The New Industrial State
In The New Industrial State, Galbraith argues that economic decisions were planned by a private-bureaucracy, a technostructure of experts who manipulated marketing and public relations channels. This new business order was self serving, generating guaranteed profits as predictable results of a controlled market. Managers were merely functional parts of an automated business profit machine. Nothing unprofitable would be produced no matter how much consumers needs or wanted them. Corporation planning replaced national planning in the name of free enterprise. To ensure a predictable cycle of demand, the concept of planned obsolescence was born so that new products would be in demand as planned.
In Galbraith’s time, big business recruited governments to serve its narrow interests with favorable fiscal and monetary policies, with comforting slogans such as “What is good for General Motors is good for America”, leading the car manufacturer to produce and market cars not safe at any speed. They imposed monetarist policies designed to enrich money-lending financial institutions at the expense of the working public. While the goals of an affluent society and complicit government served the pampered overblown technostructure, the public sector was simultaneously impoverished in the name of economic freedom, denying needed public service to most except the most affluent. Galbraith painted a real picture of the US economy in contrasting enormous private wealth against neglected public facilities amid general poverty.
The New Financial State
If Galbraith were writing today, he would most likely entitle his new book: The New Financial State. And the slogan for the new order of financial capitalism would be: “What is good for Goldman Sachs is good for America”, since US industry had gone down the offshoring drain, as highlighted by the bankruptcy of General Motors and needed government bailout, while its subsidiary in China was making huge profit.
Goldman Sachs Doing God’s Work
After all, Lloyd Blankfein, the CEO of Goldman Sachs, told the Times of London that his firm was doing “God’s work”. When the credit crunch hit, Goldman’s losses in the subprime mortgage sector added up to only $1.7 billion, lower than any other big investment bank, due to the fact it had sold most of the worthless instruments to its clients shortly before the credit market meltdown in July 2007. By comparison, UBS lost $58 billion.
In 2008, in the depth of the financial market turmoil, Goldman still paid out $20 billion in salaries and bonuses for its workers for doing God’s work. Of course, the government rewarded Goldman for doing God’s work with $10 billion from the Troubled Asset Relief Program (TARP).
Goldman has since repaid the emergency cash that saved the firm from defaulting on its obligations, with healthy interest at 23%, paid with profit Goldman realized by using government money to aggressively squeeze unfortunate counterparties that did not received Gold’s help.
Goldman also benefited from the federal bail-out of the huge insurance firm AIG. Goldman had bought $20 billion worth of insurance in the form credit default swap (CDS) from AIG that Goldman would not have collected were it not for the Treasury pumping $90 billion into the insolvent insurance giant.
Galbraith’s New Socialism
In Economics and the Public Purpose (1973), Galbraith advocates a “new socialism” as to replace financial capitalism, nationalizing military production and public services such as health care, introducing disciplined salary and price controls to reduce inequality. But by then, the neo-liberals were gaining control of the economic establishment and the neo-conservatives were dominating political discourse. Instead of the new socialism, the country went on a frenzied rampage of privatization of the public sector.
The Contribution of Walter H Hamilton
The term Institutional Economics and its core concepts traced back to a 1919 American Economic Review article by Walton H. Hamilton (1881-1958) who argued that economic and legal concepts evolve in specific historical and social contexts and that, when these concepts are removed from their context and generalized into universal legal principles, such universal principles could lead to unexpected, unintended and even socially undesirable results.
This is a key reason why US policymakers are frequently at a loss as to why universalized core US values that seem so obviously desirable to Americans conditioned by US historical and social context, are vigorously resisted in other regions of the world with vastly different historical and social contexts from those of the US.
Connection of Politics, Law and Economics
The field Political Economy implied the inseparable connection between politics and economics. As regulation on the economy must be mandated by legislative processes, law is as inseparable from economics as it is from politics. The public interest involves all issues of economics, civil rights and freedom.
Hamilton developed these insightful arguments in a series of articles in the 1930s, including: Affectation with a Public Interest (1930), The Ancient Maxim Caveat Emptor (1931) and The Path of Due Process of Law (1938).
Wages and Prices
He also conducted a series of studies on free markets operating under industrial capitalism, showing that wages and prices in so-called free markets were not set by market forces, as claimed by neoclassical economists, and later set up as natural law by neo-liberal free market promoters in the final decades of the 20th century.
Hamilton found among other things that wages and prices are instead framed by specific historical and social contexts, resulting in social aversion against stagnate wages and constantly rising prices. When such historical and social contexts are ignored in unregulated free markets, the traditional functional relationship between wages and prices can collapse to produce failed markets.
Competing to Destroy Competition
Competition in a free market is not as naturally healthy a process as neo-liberal trade promoters assert it to be. Competition needs close regulatory support to survive the natural hostility against itself in free markets. The irony in the law of competition is that market participants compete to destroy competition, not to enhance it. Market competition in business is and has always been what company management compete to eliminate, or at least to reduce as much as the law permits. No-holds-barred competition in free markets will quickly become unethical, unjust, and unproductive to growth.
Markets Affected by Historical and Social Contexts
Markets are delicate social institutions fundamentally affected by specific local historical and social contexts and of the fact that markets are highly fragile social organisms that require close monitoring, nurturing and regulating to function efficiently, properly and optimally. This understanding of markets is of particular significance in today’s era of globalized international free trade.
Today’s trading nations still possess vastly different historical and social contexts that are elementally out of sync with wishful modernist views of universal convergence. The world’s national economies are still vestiges of different historical experiences, at different stages of socio-economic development, causing some to aspire to alternative futures from that presented by problem plagued Western capitalist models.
Universality vs Variety
Does the world really wants McDonnell Happy Meal hamburgers type of bland fast foods to displace rich traditional ethnic cuisine? Should that kind of artificial universal convergence be the purpose and outcome of socio-economic growth? Already all the prime retail locations of luxury goods in major world cities are beginning to look alike, with the same shops filled with the same dominant global brands, pushed by the same advertising marketing pitches, appearing as standard look-alike international airports where travelers would not know what country they are in until they look at the welcoming name signs.
This lingering contextual variance of trading nations has provided unregulated non-market-driven profit opportunities from cross-border arbitrage on both prices and wages in globalized world trade. Such profit opportunities, if not regulated in accordance of varying historical and social contexts, will be counterproductive to socio-economic growth even when monetary trade volume continues to rise.
The World is Still Not Flat
One can be thankful that the world is still not yet flat, notwithstanding Thomas Freidman’s simplistic, single dimensional, best-selling declaration (The World Is Flat - A Brief History of the Twenty-first Century - Farrar, Straus & Giroux, April 2005 – a third update: version 3.0 has since been released, as if truth needs to be updated like software programs to a later version every 18 months).
According to Friedman, who has developed a successful career with a writing pattern of declaring superficial earth-shaking insights that need to be retracted subsequently after careful thought, the planet called earth has been flattened operationally by technological advances in communication, business management and global trade.  The flat earth image is not as ingenious as most book reviews gave it credit for. In the Medieval version of the concept of a flat earth, people thought that any ship that tried to circumvent the world would eventually fall off at the edge of a flat world into the abyss of the unknown and never return to the original points of the voyage. 
This is exactly what the corporate ship of the “dot-com revolution” (more accurately: the dot-com bubble) of the mid 1990s did as the inflated shares of these high-flying new start-ups that had never actually earned any profit, fell through the flat floor of stock exchanges to the abyss of insolvency, losing billions for their investors.
Friedman seemed to have missed the recurring financial crises of 1987, 1997 and  2007 in his celebration of the wonders of new technological world in finance. He seemed to be unaware that these recurring financial crises were the result of technological innovation in financial services and transactions involving new instruments such as MBS (mortgage backed securities), CDS (credit default swaps), CDO (collateralized debt obligations) and other new alphabet pasta in the financial soups of deregulated financial markets that the uninformed investing public, advised by equally uniformed institutional money managers, learned to love the high returns of these arcane financial instruments without full understanding how they actually worked, or the systemic risk they posed.
And, if the world is actually flat as Friedman suggests, there is no reason or purpose to conduct international trade, because opportunities for profit from trade would be all smoothed out.  Friedman did not seem to understand that trading profit has always and will always come from reducing market inefficiencies, a basic rule in the efficient market hypothesis (EMH) developed by Eugene Fama at the University of Chicago Booth School of Business, in the field of behavioral finance.  EMH states that prices of stocks reflect the market's aggregate response to information. Any one market participant can be wrong about price levels, even every market participant can be wrong, but the market as a whole is always right. The dot-com bubble operated within the EMH, only the information behind the rational expectation was false.
Unfortunately, the kind of unregulated technolog-driven globalized trade so celebrated by Friedman, operating in the name of global free market fundamentalism, in defiance of varying local historical and social contexts that constitute a rich and colorful world, has not produced a flat level playing field for rising wages in different countries. It has kept domestic wages in historically low-wage economies from rising. It has also exerted downward pressure on wages in historically high-wage locations in order to slow down the outflow of wage-paying jobs to off-shore lower-wage locations through cross-border wage arbitrage, a production process known as “off-shorings” in global management nomenclature. It has also created structural price-induced shortages in low-price locations as producers face irresistible compulsion to ship all goods their underpaid workers produce at low-wage locations to sell in highest-price markets where wages are highest to support strongest consumer demand.
Thus labor-intensive, low-wage exporting nations in globalized world trade not only have to keep domestic wages low in order to compete in more efficient high-wage markets, they also have to deprive their domestic market of the low-cost goods produced by low local wages. Low-price products in low wage location are really high-price product by default when measured by low local wages. Shortages are therefore created when goods must be sold at the highest price in markets in highest-wage locations in order to maximize profit.
Critique of Positivist Legal Formalism
In the 1930s, Hamilton was a frequent advisor on FDR’s New Deal policies and programs. He eventually left Yale to become a full-time deputy to Thurman Arnold who headed the Antitrust Division of the Justice Department in the FDR administration, Thereafter, Hamilton joined Arnold’s newly formed Washington, D.C. law firm, Arnold, Fortas & Porter, which would be destined to become one of the nation’s most successful law firms on anti-trust matters. At the Yale Law School, a professorship chair was established in Hamilton’s honor in 1965.
Hamilton, trained and working not as a lawyer but an economist, was a leading intellectual force in the Legal Realist movement at the Yale Law School, applying new insights of institutional economics in market economies to legal contexts, and producing sharp critiques of legal formalism and its positivist view in the philosophy of law and jurisprudence.
Denial of Connection between Law and Morality
The principal claims of legal positivism revolve around the idea that there is no inherent or necessary connection, or even convergence, between validity in law and validity in morality. To the legal formalist with positivist views, laws are rules of behavior made by human beings with subjective fixations, whether deliberately or unintentionally, and not ordained by nature or laid down by almighty God.
This claim on the separate sphere of law and morality on the part of legal formalism is analogous to that of St Thomas Aquinas, nicknamed Dumb Ox by his contemporaries because of his slow and deliberate manner of speech, brilliant father of Neo-Scholasticism. Efforts of followers of Averroes in the 13th century to separate absolutely faith from truth clashed with the traditional claim of truth being exclusively a matter of faith. Such a claim had been made for the previous nine centuries by followers of St Augustine, whose contribution to the evolution of Christianity was considered second only to that of St Paul, apostle to Gentiles and the greatest missionary apostle.
Thomas Aquinas aimed to resolve the dispute between Averroists and Augustinians, by holding that reason and faith constitute two harmonious realms in which the truth of faith complements that of reason, both being gifts of God, but reason having an autonomy of its own. The existence of God could therefore be substantiated through reason, with the grace of God.

The theological significance of this momentous claim by Thomas Aquinas cannot be over-emphasized. It would save Christianity from falling into irrelevance in the Age of Reason, sometimes referred to as the Enlightenment, and preserve tolerance for faith among rational thinkers in the scientific world. The Thomist claim remained unchallenged for five centuries until David Hume (1711-86) pointed out in his Inquiry into Human Understanding, published in 1748, that since the conclusion of a valid inference could contain no information not found in the premise, there could be no valid conclusion from observed to unobserved phenomena.

Hume let the logic air out of the Thomist natural-theology balloon, and in the process showed that even general laws of science could not be logically justified beyond their own conceptual limits, perhaps even including his own sweeping conclusion. Hume, the empiricist, would logically determine that logic is circular and goes nowhere: a classic position of Taoist skepticism.
The Connection  between Law and Social Justice
Legal formalism, as the term is used in US legal circles, differs from Jeremy Bentham’s Anglo-utilitarian legal positivism in that legal formalism does not deny the relevance of the substantive justice of a law, but rather, that in a democracy, the issue should to be addressed by the elected legislature, which respresents the will of the people, not by appointed Judges to interpret or pontificate
As with the Thomist claim on the separate but complementary aspects of faith and reason, legal formalism distinguishes law from morality while acknowledging their interdependent supplementary connection. (Please see my July 12, 2003 AToL article: THE ABDUCTION OF MODERNITY: Part II: That Old Time Religion)
The Contextual Utilitarianism of Jeremy Bentham
Bentham observed that when legal concepts that had evolved in specific historical and social contexts are removed from context and generalized into universal legal principles, surprising, unintended and even undesirable outcomes could result. This insight explains why official US declaration of “democratic values”, the “rule of law”, “freedom” and “human rights” sounds hollow to many around the world who have not had directly experience in life in the unique US historical and social context.
Utilitarianism, as defined by Bentham, is “the greatest happiness, or felicity principle”. The moral worth of an action is determined solely by its contribution to maximizing utility (happiness). It is thus a form of consequentialism, meaning that the morality of an action is determined by its outcome. All actions have consequences, whether intended or not. In its extreme, this is a position of “the end justifies the means”.
The Pitfall of Mechanical Jurisprudence
Legal formalism is sometimes derided as “mechanical jurisprudence” when a judge decides a case without regard for the consequences of the legal rule or the legal rule or the purpose of the law, such as King Solomon’s ruling to bisect the living baby to satisfy to a custody dispute between two women both claiming to be the child’s rightful mother. Yet King Solomon’s ruling was merely a ploy to smoke out the pretender who would readily agree to a compromise that meant death for the child.
Legal formalists are fond of saying that judges should apply the law and not make it. But even then, critics counter that judges should not merely follow literally the letter (text) of the law to ignore the spirit (intention) of the law.
Contemporary legal formalism is particularly controversial in the areas of constitutional law and statutory interpretation. In constitutional law, legal formalism is associated with “originalism,” the view that the constitution should be interpreted in accord with its “original meaning.” Strict construction in “original meaning” requires a judge to apply the text only as it is written (texturalism), without allowances for changing context.
Legal formalists assert that judges should avoid drawing inferences from a statute or constitution beyond the literal meaning of the text itself to inquire into non-textual sources, such as the intention of the law-makers, the specific injustice the law was intended to remedy, or substantive questions of the justice and rectitude or fairness of the law.
Supreme Court Justice Hugo Black, a texturalist jurist and strong supporter of the New Deal, was nominated by FDR in 1937 and served 34 years until September 17, 1971, eight days before his death at age 85. He
argued that the First Amendments injunction that “Congress shall make no law respecting an establishment of religion or prohibiting the exercise thereof; or abridging the freedom of speech, or of the press,; or the right of the people peacefully to assemble, and to petition the government for a redress of grievances,” should be construed strictly as: no law, with no exceptions or allowance for extenuating circumstances and changing conditions.
Strict Conntructionism and Conservatism
Strict constructionism is often used in US political discourse as an umbrella term for conservative legal philosophies. such as: originalism and textualism, which emphasize judicial restraint and fidelity to the original meaning of constitutions and laws. However, progressive judges can also be strict constructionists to preserve progressive context in cases where proponents of latter-day neo-conservatism try to dismiss as irrelevant the progressive context of the original framers of the Constitution.
The term “strict constructionist” is sometimes misused today to describe only conservative judges or legal analysts, when it would fit both conservatives and progressives using the literal reading of the text to enhance particular ideological positions, be they progressive or conservative.
On the presidential campaign trail in 2000, when speaking on his choices for new Supreme Court Justices, candidate George W. Bush promised to appoint “strict constructionists in the mold of Justices Rehnquist, Scalia, and Thomas,” though Thomas considers himself an originalist, and Scalia, a textualist, rejects strict construction, calling it “a degraded form of textualism.”
Legal Instrumentalism
Legal instrumentalism is at the core of US legal realism as practiced by Oliver Wendell Holmes, Jr., Roscoe Pound, and others judicial giants. Legal instrumentalists generally agree that legal rules should be interpreted in light of their social purposes. When applying the letter or text of the law undermines its social purpose or spirit, then the rule should be interpreted by judges so that the social purpose is preserved or even enhanced. Judges who practice legal instrumentalism would give the text of the legal rule an expansive interpretation to support the spirit of the law.
Realist Critique of Legal Formalism
Realist critique of legal formalism focuses not only on the risk of “mechanical jurisprudence” ending up with outcomes that are contrary to the original intention of the law, but also on the possible hypocrisy perpetrated by partisan in the name of legal formalists. Many self-styled formalist judges actually decide on the basis of their own political ideology and policy preference under the cover of legal formalism to make their bias decisions appear respectable.
Political ideology revisionism has been behind the revival of legal formalism in recent decades as the nation moved further away from its equalitarian beginning. Legal formalism has been used by neo-liberals to dismantle legal precedents that conflict with their own ideological positions, by continuingly attacking prominent constitutional decisions of the liberal Warren and Burger Courts, such as Roe v Wade in affirming a woman’s constitutional right to seek abortion until viability of survival of the fetus outside the womb. Critics of legal formalism fear that as a judicial philosophy, it can be used disingenuously to rationalize the dismantling of controversial or unpopular legal precedents.
The Roe Court deemed abortion a fundamental right of women under the Constitution, thereby subjecting all laws attempting to restrict it to the standard of strict scrutiny. The opinion of the Roe Court, written by Justice Harry Blackmun, declined to adopt the district court’s Ninth Amendment rationale in ruling for Roe v. Wade, and instead asserted that the “right of privacy, whether it be founded in the Fourteenth Amendment’s concept of personal liberty and restrictions upon state action, as we feel it is, or, as the District Court determined, in the Ninth Amendment’s reservation of rights to the people, is broad enough to encompass a woman’s decision whether or not to terminate her pregnancy.”
The Ninth Admendment, part of the Bill of Rights comprising of the first ten Amendments, addresses rights of the people that are not specifically enumerated in the Constitution. It reads: “The enumeration in the Constitution of certain rights shall not be construed to deny or disparage others retained by the people.” In eleven words, it spells out the US political system as being based on the reserved rights of the people not specifically granted to the State.
While the US legal system holds up fastidiously the sanctity of private property rights and private contracts, dealing harshly with crimes of theft of property, it leaves the issue of social contract beyond the boundary of law, ignoring the injustice of systemic theft from the poor and powerless. Legal formalism is frequently used to mechanically rationalize structural systemic social injustice in the American economic system.

April 3, 2011

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