Internal Improvements and Externalities in Dorfman

Joseph Dorfman (Murray Rothbard's dissertation advisor) wrote a seminal three volume history of The Economic Mind in American Civilization, covering the period from 1606-1919. I've been reviewing Dorfman's treatment of internal improvements recently, and found a good expression of the case for public works made in the early republic from an externalities perspective. He writes:

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"Clay [Henry Clay], in amplifying this position of government aid, took to task the critics for following the visionary 'let alone' principle of the political economists and asserting that when the condition of society is ripe for internal improvements - that is, when capital can be invested in them with a prospect of adequate renumeration, associations of individuals will execute them without government aid. But this general maxim, Clay insisted, holds without exception only for old countries possessing a great accumulation of surplus capital. Greatest of the gainers from government aid for internal improvements would be the farmers, in cheaper transportation for their produce to market.

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Lowndes [William Lowndes] accepted the general principle that the private direction of industry and capital would generally conform to the public good, but he did not admit that all public improvements must be supported exclusively by private subscription: Canals and roads are in every civilized country the object of government. Roads are usually supported by taxes. The policies flow from the general position that a public improvement would be profitable to the public, though not sufficiently profitable to private parties unless they receive government aid. The profits of a turnpike road are distributed among the stockholder, landlords, travelers; and, though a company constructing it might make only 5 per cent, the country might gain 10 percent."

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Not surprisingly, the logic of externalities long pre-dates Pigou and formed the bedrock of early American support for public works and internal improvements. Dorfman goes on:

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"The general measure was passed by Congress both in 1817 and 1818, but it was successively vetoed by two Virginia Presidents, Madison and Monroe, who now read the Constitution a little differently and more strictly than they had on previous occasions. They both expressed great sympathy for internal improvements but thought that Congress would have the power only through a constitutional amendment. Calhoun, on the other hand, said that he 'was no advocate for refined arguments on the Constitution. The instrument was not intended as a thesis for the logician' on which to exercise his ingenuity. It ought to be 'construed with plain good sense,' and he found accordingly that the power to raise money is not limited to the enumerated powers but to the achievement of the general welfare."

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The last sentence stands out as a little odd, since the power to raise money for the achievement of the general welfare is the first of the enumerated powers (regardless of how you interpret the term "general welfare", there's no contesting the fact that the power to appropriate money for it appears as an enumerated power). This covers the territory discussed earlier on this blog about Madison's changing view of the Constitution with respect to public works.

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Elsewhere, Dorfman considers Jefferson and Washington's advocacy of improvements of the Potomac River. Again, the argument is made on the basis of externalities - that the project will not just benefit shareholders, but that it will benefit all Marylanders and Virginians who will share in the Ohio trade. Indeed, it would benefit the Union itself, which would form a closer connection between East and West. Jefferson and Washington were both visionary men who found it reasonable to pursue the interests of the broader public and future generations. The point is, those interests aren't usually represented in the context of a market.

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I think this question of the Constitutional amendment is worth exploring more. I'm personally still a little hazy on precisely what Madison and Monroe thought needed to be amended. What Jefferson thought needed amendment was quite clear: he was only concerned about state-level approval of federal public works. Jefferson's view was that the federal government did not have the authority to build in a state without the state's approval, not that it did not have the authority to appropriate money for approved public works. Is this all Madison and Monroe required? Or did they think (did they think in 1817 and 1818, that is) that the Constitution required even greater adjustment than that to accommodate federal public works?

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And what is the practical difference between a clear majority that thinks the Constitution already provides authority to implement public works and a minority that wants the Constitution to provide that authority but doesn't think that it currently does? If the generations of Supreme Courts that have upheld public works projects and the preponderance of public understanding isn't enough on its own, isn't it reasonable to assume that if the skeptics like Madison and Monroe had been successful in proposing an amendment, it would have passed overwhelmingly? In other words - it seems to me the only reason why a more specific amendment isn't there is that so few considered it necessary, and those who did consider it necessary agreed in practice with those who didn't on the value and legitimacy of federal public works projects. Had more people considered the amendment necessary, is there any doubt that the amendment would have passed? So why should we be tyrannized by a very narrowly accepted interpretation of the Constitution which would have been amended into irrelevance if it had a been any less narrowly accepted?

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Crozet's Map of the Internal Improvements of Virginia