Constitutional Enterprise

Volume 2 Number 4, December 1994

In This Issue

In Volume 2 Number 1 of Constitutional Enterprise I described in general terms the three major systems of CE—the constitutional, market, and profit systems. The purpose of this issue is to define the constitutional system of the CE model in greater detail. I'll answer the three questions: What is constitutionalism? Why is it important to have a constitutional structure for businesses? And what does a constitutional system look like in such businesses?

What is Constitutionalism?

The first defining characteristic of constitutionalism is a written constitution. It is a relatively new concept on the scale of human history. In 1776, when the Declaration of Independence was signed, only four of the thirteen colonies had written constitutions. Eleven years later 55 delegates met in Philadelphia to draft the constitution we use today. The trend has grown until today only a handful of nations in the world do not have a written constitution.

Unfortunately, the fact that a constitution is in writing is not a guarantee of freedom for the people. Hitler rose to power under a written constitution. And for many decades the Soviet citizens have been saddled with oppressive rulers working under the authority of written constitutions. To provide protection for people, our concept of constitutionalism must include other features in addition to being in writing:

• A policy or law, superior to those created by ordinary legislation, and typically considered the founding principles of a governmental system—the supreme law of the land.
• An organizational structure drawing its authority directly from the people.
• A system for the protection of natural rights; such as, rights of life, liberty, and property.
• A separation of powers with checks and balances to prevent tyranny or usurpation of authority.

All of these features are present in the United States Constitution, but not necessarily in the constitutions of other countries.

After the Constitution of the United States was ratified, the countries of Europe looked upon the new experiment in government with extreme skepticism. It seemed inconceivable to them that people could administer their own government without devolving into anarchy. In their view monarchs were needed to control the people toward productive ends. The new constitution, however, left productive activities entirely in the hands of the people, and granted only limited powers to the government.

Although the Founding Fathers recognized that government derived its authority from the consent of the governed, they were wary of democracy. They recognized that tyranny could emerge as readily from the votes of the majority as from the edicts of a monarch. Certain matters were never intended to be open to a vote. Individual rights; such as, life, liberty, and property, should not be subject to public preference—the whole fabric of society rests upon them. Instead the framers of the constitution established checks and balances to protect against tyranny, and placed these safeguards beyond the control of ordinary legislation—in a constitution. Thus, the single most important feature of constitutionalism is its protection of individual rights.

Why Constitutions For Businesses?

The central theme of CE is that internal market systems in businesses will promote greater efficiency and innovation than top-down authority structures. One need only compare the market-based countries of the West to the collectivized countries of the East to see ample evidence of this truth.

In adapting businesses to use an internal market approach the challenge is to establish a stable environment in which the market system can operate efficiently. Markets are literally places where people exchange ownership rights, and capital naturally seeks its most productive use. To the extent ownership is insecure or uncertain exchange is hampered and capital is used less efficiently.

Constructing a system of employee ownership is a special challenge because all property in a business is actually owned by the stockholders. One approach is to make the employees themselves owners of the company. Unfortunately, the dual role of owner and employee adversely influences investment decisions—capital is used to preserve jobs regardless of market demand and capital no longer flows toward its most productive use.

A better approach is to create a metaphor for owning property. Ownership, or rather internal ownership in this sense, is not the same as ownership in the external society because the employees cannot use this "property" for purely self-benefiting purposes. Rather, their role is more like custodians or stewards over the property. Within the context of a business this special type of ownership is just as real as ownership in the external society—they may use and dispose of property as though it was their own, except the proceeds of these activities remain the property of the shareholders. Combined with an equitable profit sharing system this approach makes the productive use of property beneficial to both themselves and the stockholders.

The reason for having constitutions inside of businesses is the same for having them outside—to protect ownership rights, and thus foster the climate necessary for market exchange.

Constitutional Structure

In a CE business the constitutional system is defined by a written company constitution and is composed of the offices, procedures, and principles used to guide both company wide and departmental governments.

Officers of the company and departmental governments need not serve full-time. Indeed, in most cases the duties of officers should occupy only a small portion of their time, the remainder of which they spend in their business units, occupied in their normal jobs. Company office will not be sought after for achieving higher wages. Wages for officers will not be greater than they would receive in their business units, but will be paid for by assessments from the whole body of those they serve, so that company service will not become an undue burden on the business units in which the elected officers are employed.

A separation of powers exists between the departmental governments, the company government, and the employees, with their respective duties strictly limited. Another separation exists between the three branches of the company government—the legislative, judicial, and executive branches. These separations prevent any one portion of the company from becoming too powerful and violating the ownership rights of either employees or internal business units.

There are no "term limits" on any company office. Term limits disqualify good as well as bad officers. The election process is the check on the system whereby bad officers are removed from office.

The major responsibility of the company government is to define, mediate, and protect the exchange of ownership rights within the company. Company officers have no authority over the design, production, or delivery of goods and services, except as necessary to protect ownership rights.

Like the legs of a three-legged stool, the three supporting elements—legislative, judicial, and executive—provide a stable environment in which the internal free-market operates. They are the head, heart, and hands of the company government. As noted in Volume 1 Number 2 of Constitutional Enterprise a constitutional structure with these three branches is ideally suited to securing the three conditions necessary for motivation and progress to occur—legitimacy, equity, and opportunity. Attempting to create an internal market system without all three supports will leave a company as unstable as a stool with only one or two legs.

The constitution of a CE company is patterned after the United States Constitution and contains each of the following sections:

Legislative Branch—The company constitution contains a description of the structure and functioning of the company legislature, including: their manner of election, procedures for passing policies, their powers, duties, and limitations. Like its external counterpart, this branch consists of two separate bodies—a Senate and a Board of Representatives. [1]

The purpose of the Legislative Branch is to define exclusive and legitimate ownership rights and establish company-wide policies for protecting such rights. In addition to governing ownership of material goods, this includes measures for securing trade names, trademarks, designs (patents), and copyrights; establishing rules governing contracts; and defining obligations which extend beyond the company boundaries. One goal of such legislation is to eliminate "The Commons" —a condition of communal ownership. [2]

In the external society a failure to identify exclusive ownership rights creates realms of common ownership and is often responsible for great injustices and environmental catastrophes. These are usually referred to as externalities or market failures, since the market appears to be unable to solve them. However, the failure lies not in the market system, but in the legal system which has failed to identify the necessary ownership rights. Thus, the role of the legislative branch is to internalize the externalities—to bring external effects inside the market system. Once ownership rights are defined and enforceable the commons disappears, the free-market system steps in, and any so-called market failures are resolved. [3]

The executive branch consists of a president, and vice president. They are not democratically elected, but appointed by special representatives of the employees, called electors, who identify the skills needed for the two positions and then appoint qualified persons to fill them. [4]

This judicial review process is necessary because concepts of justice are not really be created, but discovered. [5] Cases are occasionally brought before the court that fall into a gray area of policy. Since the legislature cannot pass a new policy to resolve a past conflict, ex-post facto, the judiciary must strive for a just resolution itself for the specific case being tried. And since the judiciary is not a policy making body, its decisions should not apply to future or different cases. However, they can void an unconstitutional policy and recommend legislation to correct it.

Members of the judicial branch are appointed by the president of the company, with "the advice and consent of the legislature." Likely choices for members of the judiciary are former legislators who have been involved with drafting policies concerning ownership, but the president isn't limited to such choices. An appointment to the judicial branch lasts as long as the person chooses to be employed by the company. [6]

Without an appeal to judicial authority the contractual obligations of exchange would be risky, and outspoken iconoclasts would be in jeopardy of suffering from democratic abuse. [7] The presence of the judicial branch, and the potential of their participation in punishing violations and settling disputes, creates an awareness of equity in the minds of the company employees. It supports the functioning of the internal market system by ensuring obligations will be fulfilled.

As a condition of employment each employee must agree, in writing, to delegate authority to the company government to define, mediate, and defend his or her ownership rights, and agree to be bound by the constitution. This creates a contract between each employee and all other employees in the company. [8]

1. The Board of Representatives, who represent the employees, is not to be confused with the Board of Directors, whose members are still appointed by the stockholders of the corporation. The Board of Directors will be discussed in a future issue of Constitutional Enterprise.Return

2. The commons is a term originally used by Garrett Hardin in his classic article, The Tragedy of the Commons. In it he describes how the communal ownership of resources naturally brings "ruin to all." See Science VOL. 162, 13 December 1968, p. 1243–1248.Return

3. See Public Goods and Market Failures, Tyler Cowen editor, Transaction Publishers, New Brunswick, NJ, 1992.Return

4. Today, the offices of President and Vice President of the United States are filled by those persons most able to manipulate the media to their advantage. The original purpose of electors was to look beyond the superficial appearances to the true qualifications that were needed. (See, Alexander Hamilton, James Madison, and John Jay, The Federalist Papers, originally published 1777–1788, © 1961, The New American Library, New York. Paper No 68, by Hamilton, discusses the executive.)Return

5. The discovery process of "rules of just conduct" is discussed at length in Friedrich Hayek's three volume work, Law, Legislation and Liberty, © 1973, 1976, 1979, University of Chicago Press, Chicago, Illinois.Return

6. Under the U.S. Constitution lifetime judicial appointments have provided a check on the influence other branches of the government may have on the judiciary. (See James Madison, The Federalist Papers, cited above, no 51) Return

7. The term democratic abuse may sound strange because today many people regard democracy to be a virtue in itself. However, democracy simply means majority rule. And if a majority wants to take away your property by simply voting for it, you need some means of defense. The judicial branch can provide it (See, The Federalist Papers, No 10, by Madison, discusses democracy and no 78, by Hamilton, the judiciary.) Return

8. This formality of forming a contract is crucial to understanding that government is created through a delegation of authority. The citizens of the United States also have a tacit contract with each other to form a government. Unfortunately, because the contract is never clearly defined, some people get the false impression that government exists by its own authority and can therefore undertake any activity it finds expedient. Return

Author's Confession

While my intent is to write and release a new issue of Constitutional Enterprise each quarter, this issue was late and released in January 1995.

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