Friday, March 28, 2008


Laches is the common-law name for the concept more commonly known as "the statute of limitations."[*] The idea is that, if a wrong has been done, or there is otherwise a dispute, we put a limit on the time within which the victim or the victim's estate can file charges or sue for damages. Laches or statutes of limitations apply to practically all kinds of wrongs of any nature. There are three strong reasons for setting time limits on redressing wrongs:

(1) Memories fade, witnesses die, and evidence is degraded or destroyed, rendering the rights and wrongs of the case increasingly uncertain and susceptible to biased propaganda.

(2) Security, confidence in, and stability of legal rights are crucial to a civilized legal system. But if we go back far enough, the "chain of title" for almost every legal right we have (including our political as well as economic rights) can be plausibly argued to be illegitimate due to some kind of unredressed wrong: some commission of force or fraud that was never remedied. Without a time limit, hardly any legal right of almost any kind could be held with legal security.

(3) Having the estate of one person be responsible to the estate of another person for a wrong committed by the ancestor of one to the ancestor of the other gets us too far away from the individual responsibility and the shaping of behavior through incentives that is at the core of law.

Laches should also be a core political principle. Allowing some classes of citizens to extract "reparations" from other classes of citizens for harms done by some or many of the ancestors of members of one class to some or many of the ancestors of another class, without setting any time limits, renders the legal rights of all persons insecure. Evaluations of ancient wrongs are susceptible to very distorted propaganda. Punishments of individuals who did not commit the wrongs do not deter the recurrence of such wrongs in the future, and indeed are themselves wrongs that foster further resentment and breed more future claims for redress. The moral imperative holding the members of one very imperfectly defined class, rather than persons who actually committed the wrongs, for the wrongs committed to some of the members or ancestors of another class, already doubtful, becomes increasingly doubtful as time goes by, as does the power of such laws or other political acts to shape behavior to desirable ends through incentives.

[*] Technically, the term "statute of limitations" applies where a statute expressly sets a time limit, and the doctrine of laches applies where no such statute exists.

Wednesday, March 26, 2008

How our frog was boiled

Libertarians have long observed with regret the radical expansion of the power of the United States federal government over its original scope under the Constitution of 1789. Lovers of freedom tend to blame two chief culprits for this expansion: President Abraham Lincoln, who instigated our Civil War, and President Franklin Delano Roosevelt with his New Deal. And indeed, these Presidents did instigate some noxious precedents: Abraham Lincoln the draft and income tax, FDR the advocacy of positive substantive rights and the birth of practically unlimited regulatory power of federal government. Some cite villains from the Progressive Era, such as Theodore Roosevelt and Woodrow Wilson.

However, these theories oversimplify U.S. history to the point where the real and fixable sources of our loss of freedom cannot be identified. They make it sound like if we could simply go back in history and remove a handful of powerful villains, or avoid a handful of crises, then we would be living in a much freer society today. That is very far from the reality.

The consequences of even Lincoln and FDR were not unmixed. Lincoln damaged some freedoms, but he also greatly increased freedom by ending slavery. The Civil War Amendments, especially the 14th Amendment, eventually led to a great increase in the enforcement of unenumerated rights (hence the name of this blog!) and the Bill of Rights against the states (and, for reasons I relate here, hence also against the federal government). Among the leading countries in the middle of the evil 20th century, the United States despite FDR was the most free. FDR destroyed the threat of fascism and appointed most of the Justices who ended forced and unequal segregation by race. One can easily argue, especially in the case of FDR, that the curses outweighed the blessings, but one cannot seriously portray even these powerful Presidents as unmixed enemies of freedom. It's great fun, and may be morally imperative, to blaspheme these great gods in the pantheon of government worship, but criticisms of these particular actors don't get us to the core of why, in the face of a Constitution that outline a strictly enumerated set of powers, the adherents of that religion were able burst far beyond those bounds and render them nugatory.

The expansion of power of the U.S. federal government was not primarily due to villians, crises, or revolutions, but far more resembled the proverbial boiling frog: it mostly happened by small and obscure steps that were not widely noted by lovers of freedom at the time, and have seldom been noted by us since. The slow rot of Constitutional protections against federal power stemmed from subtle but endemic flaws in the original frame of our federal government, the rise of an economy where large numbers of people earned income from auditable corporations (making the income tax, the most lucrative tax in history, practical), and the disappearance of frontiers of free land to which the overtaxed or overregulated could flee. This article focuses primarily on the first, the clearest and most fixable cause, the procedural flaws in our Constitution.

The U.S. Constitution lists a number of enumerated powers, beyond which Congress was granted no power to legislate. In other words, the U.S. Congress was supposed to have a small, close-ended list of powers, and this is still recognized by the Supreme Court as theoretically true today. If this had remained true in practice, as well as legal theory, the U.S. federal government would be a radically libertarian entity today. That it is no longer practically true, is, more than any other factor, due to the long series of usurpations of power by Congress under the Commerce Clause, which in its words gives the Congress the power to regulate “commerce among the States.” At the time, this power was thought to be limited to power to regulate the transport of goods and persons across State boundaries, and indeed in the first century of the Constitution it was largely in practical fact so limited. (There are a number of other causes, such as the 16th Amendment of 1913 legalizing the income tax, but the Commerce Clause is the way in which Congress has most expanded its power to regulated, and an extremely vast expansion it has been).

It’s fairly obvious why Congress, by itself, has not and would not seriously let any kind of Constitutional text limit its own power. Less obvious is why the Supreme Court, which has the final word on interpreting Congressional power to legislate under the Constitution, would allow Congress to so greatly expand its powers. But that is just what it did, by many slow and incremental steps.

Under Chief Justice Marshall, there were a number of cases restricting the power of States to regulate what Marshall argued was interstate commerce, and thus under federal jurisdiction. In immediate effect these were libertarian decisions, since they overturned often burdensome State laws. The Marshall Court, and the Story Court that followed it, refused to find, even once, any limits on the federal Commerce Clause power. Although it was generally agreed that “commerce among the States” was limited to the transport of goods and persons across state lines, Marshall refused to define it in this manner, or indeed define any clear outer limited to the Commerce power. Indeed, in dicta (sentences in a legal opinion that are not legally binding, because they are not logically necessary for reaching the verdict), Marshall suggested that any activity that “effects” such transport might be regulated. Although Marshall’s nationalist ideology set the tone, overturning state laws and ignoring federal laws, this pattern of limiting state usurpations but ignoring federal usurpations was largely continued by future courts, for reasons of bias or conflicts of interest caused by court selection and structure which I describe here.

Although there were a handful of cases limiting the Commerce Clause in very narrow and specific ways at the end of the 19th century, the Swift v. U.S. case in 1905 greatly expanded the Clause’s scope to cover manufacturing, not just the transport of goods or persons across State borders, on the theory that the manufactured goods would end up in interstate commerce. This was part of the so-called “Progressive” movement, the rise of the modern religion of "the government", an omnipotent deity called upon by the national press to solve any major problem deemed to be national in scope. This era saw the greatest expansions of federal power in U.S. history, including its basic tools of financial power, the Federal Reserve system and the 16th Amendment in 1913 legalizing the income tax. During this era, in which states also greatly expanded their powers, the Supreme Court was again far more active at limiting the states than limiting federal power. The “Progressive Era” was a very broad and general ideological movement, and most of it cannot be pinned on any particular politician. Drivers of the movement included the steam press and news wire agencies, which promulgated a national view (that vague godlike phrase, “the government”, came to refer to the federal rather than state government during this era). Under this new media system information transfer became dominated by the press releases of powerful governments and corporations. The spread of government-mandated education, again inculcating a very nationalist view, in the latter half of the 19th century also played a large role. The end of free arable land on the Western frontier and the rise of the auditable corporation also played crucial roles in facilitating much greater levels of taxation. During this era, except for a handful of minor victories, the federal courts did not prevent Congress and the President under the impetus of this movement from usurping vast powers not granted them under the original meaning of the Constitution.

After this, the New Deal simply delivered the coup de grace. In Wickard v. Fillburn, the Court proved it had no desire to limit the federal government in any serious way, using Marshall’s “effects” dicta to justify its holding that growing wheat on your own small farm for your own consumption is “commerce among the States." Quite recently, the Supreme Court reconfirmed this absurdity: growing marijuana in your house is also “commerce among the States.” And thus the frog has been boiled. To this day our amphibian does not realize that it has already been cooked. The idea that the U.S. Supreme Court, given this long history of precedents, and the same kinds of selectional and operational biases it has always operated under, will ever seriously limit federal power again, just because that is what the Constitution says it must do, is far-fetched. Our courts as currently structured will only protect certain narrow rights of persons under the Bill of Rights from otherwise omnipotent governments. The idea that “We the People” will somehow elect a Congress or President that will voluntarily waive their own powers is even more absurd. Libertarians are playing a game with a very stacked deck, and that deck is stacked by the Constitution itself, the very same Constitution that in its original meaning was, substantively, radically libertarian, but that included procedural incentives for Congress and the Courts to slowly aggrandize federal powers.

Monday, March 24, 2008

The monetary value of liquid commodities

In modern commodity markets one can exchange money for commodities at almost zero transaction costs. These markets thus reflect not just the supply and demand of the commodity, but also the supply and demand of the currency they are priced in.

Because they combine liquidity with short- and medium-term supply inelasticity, mineral commodities are a good way to hedge a falling currency. When the supply of money increases or is expected to increase, whether because of lower nominal or real interest rates, because the bank that issues the currency is buying government treasury bonds or (like John Law of Mississippi Bubble infamy) mortgage-backed securities[*], or for any other reason, a disproportionate amount of the expected or surprise increase in money supply is soaked up by commodities. Indeed the commodities with the most liquid markets and inelastic supply, such as oil and gold, tend to move in lock-step with each other. Such price movement is strong evidence for the movement being primarily a phenomenon of changing money supply or demand rather than of changing supply or demand for particular commodities. If oil prices were rising primarily due to rising industrial demand for oil, or primarily because oil was getting more expensive technologically to produce (e.g. "peak oil" theory), we'd expect them to move quite differently than gold, which is demanded for primarily non-industrial reasons and has a vastly greater inventory/production ratio on the supply side than oil. That's not what we see -- we see oil and gold moving together, and indeed the price of oil in terms of gold and silver has been practically flat in the recent commodity boom. This is almost entirely due to expected or actual increases in the supplies of the currencies they are traded in (and especially recently in the weak dollar) rather than to "real" factors.

This inflation only slowly percolates into price rises in other goods and services, which tend to be far more rigid than commodities. Wages are particularly rigid. Because the U.S. Federal Reserve and most other central banks regulate their money supplies based on trailing indicators of inflation(e.g. consumer price indices) rather than leading indicators (commodity prices), it is no surprise that their decisions tend to produce boom-and-bust cycles in commodities, and that to a lesser and more delayed extent they cause both general inflation and recessions. No uncommon demand from China or the like is needed to explain the recent commodity boom, just as no such rise in demand or long-term fall in supply was needed to explain the very similar commodity boom in the 1970s. But since most people judge supply and demand of a commodity by nominal price, both in the 1970s and now we get a lot of irrational hysteria about "running out", "peak oil", how our energy industries and consumption are "unsustainable", etc. I'll believe that when oil per barrel doubles or more with respect to gold and silver. When they move together, we're just being fooled by monetary instability, and most of the current disproportionate increase in investment in energy supplies and conservation, whether traditional or renewable, is malinvestment in response to highly distorted nominal price signals, as is the accompanying political bubble of "energy security", conservation enforced through idiotic micro-regulations (e.g. banning traditional light bulbs), and so on.

Another way of putting this is that, when currencies become unreliable as a store of value, commodities take on part of that monetary role. Both oil and gold increase in value by performing this monetary function better than the currency against which they are being traded, better than credit instruments denominated in that currency, and even better, in the short term, than stocks of companies that do business primarily in that currency. The joint movements in oil and gold reflect their value, relative to the currency they are priced in, performing the monetary function of a store of value. Global supplies and industrial demands for minerals are far less volatile than the change in their value in this monetary role. It's the logical emergence of money from barter, but this emergence goes on every day that liquid commodities act as a better store of value than the currency in which they are priced. Contrariwise, as the currency becomes a better store of value than the commodity, these commodities move back down towards just being commodities valued only for their consumption. Thus their exaggerated moves, both upward and downward, in reaction to changing expectations of future increases or decreases in money supply.

Due to their exaggerated moves and the relative rigidity of most non-commodity prices, commodities themselves are an imperfect store of value. They react far more than the general level of prices to both increases and decreases in money supply, or changing expectations of same. If the Fed stops playing John Law and desists from buying bad mortgages, if others besides the Fed soak up all the new Treasuries produced by large federal budget deficits, ifcounterparty risk in credit markets subsides, the Fed can raise rates, sell securities and retire the money, and otherwise take steps to lower the money supply and stanch inflation. In such a case, commodities will react disproportionately on the downside, as they did in the 1980s. If the Federal Reserve can't do these things, dollars and dollar-denominated securities will continue to decline and people will increasingly turn to commodities to protect their nest eggs. All the ads I see and hear for gold these days suggests the peak of a commodity bubble is near, but on the other hand credit markets may worsen due to the continued crashing of the previous bubble (the housing/mortgage bubble), federal deficits may continue to increase, and the Fed may thus buy even more securities, making commodities even more attractive. I'm thus afraid that I have no buy or sell recommendations for you, dear readers. :-)

[This comment is based on a comment I recently made at the Marginal Revolution blog].

* [Obligatory Wikipedia links: John Law, Mississippi Bubble, BearStearns bailout]

[UPDATE: reader Byrne Hobarth has linked to this excellent analysis of the commodities market. This study debunks the theories that trends in supply or consumption demand, very steady over the last century, have greatly changed over the last decade. In particular, increased demand for many commodities such as copper in China has been offset by slows in growth or declines in demand in Europe and the U.S.

The studies' thesis is that the commodity runup is largely just a bubble. The study shows the spectacular rise in commodity derivatives. These represent far more contractual liability or asset than the underlying commodities. Treating commodities as money, this to me looks like a new emergent form of fractional reserve banking, but reconstructed in the investment rather than the banking sector. These derivatives, on this view, act essentially as private fractional reserve currencies, backed by a variety of commodities. The report views all this as evidence of a bubble. It points out we haven't yet seen the consumer inflation of the previous commodity bull. I emphasize yet. Consumer prices are a trailing indicator, and I believe the commodity markets are more rational in anticipating and reacting to money supply increases than they were in the 1970s thanks to the dominance of derivatives. The development of these new kinds of currencies, though prone to the risks and errors of novelty, are largely rational.]

Saturday, March 22, 2008

Representation distance

An agent (or representative) is a person authorized by his principal (or constituent) to act on behalf of that principal. The task of the agent, ideally, is to implement the will, interests, or preferences of that principal. The degree of communication and control of the principal over the agent varies greatly. Examples of principal/agent relationships include employer/employee, shareholder/management, and voter/representative. Agency law and principles can be applied, metaphorically or actually, to all such relationships. Economists study the “agency problems” that occur when the agent’s behavior is influenced by other interests, especially his own. A contract in which, when rules are not specified, one person is legally or morally expected to learn and implement the preferences of the other, or at least to maximize an abstract measure representing the preferences of another, is an agency contract.

Agency contrasts sharply with a grant of property rights. The grantee, the person to whom property is granted, is bound by the rules of the grant, not by the will of the grantor. A grantor can cause his interests to be represented only through specifying, before the grant is made, the conditional rules under which the grant is made. Within the grant condition and boundary rules, the owner of property is legally expected to act solely in his own interests. With political property rights, the “boundaries” are rules of legal procedure which the owner may not breach. A similar but temporary effect can sometimes be achieved with a contract that details all of the rules of the relationship, with the legal and moral understanding that all else about the relationship is simply a matter of personal preference rather than of one party learning and implementing the preferences of the other.

Representation distance estimates the degree of loss of information, control, or both in a principal/agent relationship. In other words, it estimates the degree to which the agent fails to know or implement the true preferences of the principal(s). In a representative democracy or republic, representation distance estimates the degree to which the representative actually represents the interests (basically equivalent to economic preferences, but in politics they might also include preferences to coerce others) of his constituents rather than others.

Representation distance generally grows with the size of group represented. Since even any two people communicate imperfectly, and have conflicts of interest between them, it's not even possible for one person to perfectly represent another, albeit such representation can far more accurately represent any interests than representing a group. One can think of this distance as being minimal, call it 1, when a person is acting for himself. When one principal delegates duties to one carefully chosen and monitored agent (a.k.a. representative), the distance is some greater value, perhaps 2. Representation distance is further compromised by majority vote, which leads to two losses: (1) the interests become increasingly general and vague, rather than the specific and concrete interests the voters actually have, as the number of voters increase and (2) the interests of minorities tend to be neglected. These numbers are purely illustrative (perhaps we should start at zero), and the function whereby representation distance increases with the size of the group represented is unknown.

A similar effect occurs in shareholder/management relationships. Shareholder interests vary greatly. Their time preferences for dividends or capital gains vary greatly. They sometimes have non-monetary interests, as in "socially conscious" investing. But the duty of management to shareholders usually gets stripped down to a very simple one, a fiduciary duty to maximize profit.

There may also be efficiency measures proportional to representation distance. For example, the efficiency of investment in public goods (where the "public" is just the population of voters) may be some function of the number of voters. On the other hand, larger representation distance may have a good effect in decreasing the ability of some voters to coerce or oppress other voters via the representative.

Vast amounts of money are put into K Street lobbying, primarily by corporations and government employee labor unions. This is readily explained by representation distance: the relationships between lobbyists and Congressmen, and even more between lobbyists and unelected but influential bureaucrats, often have a much shorter representation distance than those between voter and Representative. (The much shorter physical distance, which greatly facilitates face-to-face relationships, greatly helps to shorten the representation distance, but these are otherwise independent ideas). We can thus expect persons with sufficient resources at stake, such as corporations and government employee unions, to put far more effort into lobbying than they or others do into mere voting.

Since a political representative represents not the only normal economic preferences of voters, but also preferences to coerce others, large representation distance is not necessarily a bad thing. An effectively infinite representation distance is effective independence, which is often a good thing. (We can’t achieve perfectly infinite representation distance, of course). We want the legislative, executive, and judicial branches to operate independently, for example, not for one to represent the other. However political property rights, or contracts where when the rules are unspecified on party is not expected to learn or implement the preferences of the other, are usually a far better way than pseudo-representation to achieve independence or infinite representation distance. Political property rights turn at least putatively will-based (a representative is supposed to represent the will of his principal(s)) system into a rule-based system (the owner must operate within the procedural bounds of his property right, and is expected within those rules to learn and follow only his own preferences). Pseudo-representation -- the use of the language of agency depsite a very large representation distance -- may, however, provide an illusion of participation sufficient to satisfy the naive that their interests are actually being represented.

To summarize, no group is truly homogenous, so it's not possible to perfectly represent any group. Since even any two people communicate imperfectly, and have conflicts of interest between them, it's not even possible for one person to perfectly represent another, albeit such representation can far more accurately represent any interests than representing a group. Thus representation distance grows with the size of group represented. Much politics can be explained by problems caused by representation distances that are too long or too short, or by poor estimates of representation distance made by naive participants.

[These comments are based on my comments on a previous post, and thanks to "anonymous" for reminding me about my old idea of representation distance, and for the idea that bribery of a representative by a third party increases representation distance from the principal].

Here are some links to learn about agency law, the principal/agent problem, and political property rights.

Thursday, March 20, 2008

Unpredictable elections

Elections create a big public choice problem. People contribute money or other favors to candidates in exchange for political favors. This is economically indistinguishable from bribery. The problem with bribery is not that people can buy votes -- one can buy votes in corporations, and there's nothing corrupt about it -- but that there is a wasteful lobbying, a spending of both money and time, to purchase not votes but particular political outcomes. Arthur contributes to Bob's election, or flies Bob around in his corporate jet, or runs some "independent" ads or news stories favorable to Bob, and Bob sends some special pork barrel goodies Arthur's way, or gives him a special dispensation from a regulation that will hurt his competitors, or gets him a government job. Some of the more overt forms of this election-phase bribery can be banned or minimized by law, but for every overt form there are a dozen or more subtle or novel forms that cannot effectively be regulated.

Here in the U.S. the notorious McCain-Feingold law is an attempt to curb this problem. It is notorious because it does so by restricting free speech. In particular, it restricts who can spend how much on what kinds of speech running up to an election. Inevitably, it and similar laws are both full of loopholes and contrary to the spirit, if not the letter, of our First Amendment.

There is a far better solution that does not have significant loopholes and does not regulate any speech: make elections unpredictable. If would-be purchasers of political favors cannot predict who will win, or even who might win with substantial probability, they cannot purchase any favors prior to an election. A perfectly unpredictable election would be bribe-free.

The Grand Council Chamber in Venice

We can't make elections perfectly unpredictable, but we can get pretty close. There are historical and even contemporary precedents. For example, we choose jurors by lot from a pool much larger than the twelve jurors selected. This prevents wealthy plaintiffs, defendants, or governments from buying jurors through the selection process. (After selection, there are a number of legal and physical sequestering mechanisms that can be used to isolate a jury from contact with favor purchasers. As for political office, this article deals only with bribery during the selection process).

In ancient Athens, not only juries but many office-holders were selected by lot. But the most intriguing unpredictable election process was probably that of the medieval Venetian Republic. This republic helped turn a secure island into Europe's wealthiest trading empire. In Venice, many political offices were selected by a repeated cycle of lottery, vote, .... lottery, vote. The final lottery and vote, at least, were held one after the other in the same room, giving favor purchasers no time or privacy to do their business. The leading office in Venice, the Doge, was selected by a Great Council of about 2,000 members from those members, through a process that can be diagrammed as follows:
2,000 --> L30 --> L9 --> E40 --> L12 --> E25 --> L9 --> E45 --> 11L --> E41 --> ED
Scott Gordon describes this process as follows:
L refers here to selection by lot; E to selection by election [voting]. In the Great Council, by the drawing of balls from an urn, 30 members of the Council were selected; a further drawing reduced these to 9 who met to elect 40 men. This 40 was reduced by lot to 12 who proceeded to elect 25, and so on until the final election selected 41 nominators, who submitted their choice to the Great Council [i.e. made the final vote for Doge].
The process is loosely similar to the confusion/defusion cycles of encryption or the repeated mixing phases used for securely anonymous Internet communications. The Venetians alternated a randomizing step with a debate-and-voting step. It's not clear what, if any, function was served by the particular number choices or some of the other detailed structure. Each elector presumably had a substantial but fixed number of votes, so that there would exist a top 40, 25, 45, or 41 of vote getters despite being only 9, 12, 9, or 11 electors respectively.

I suggest the following leaner structure. A modern congressional election, for example, might look like this:
600,000 voters / 100 candidates --> E23 --> L7 --> E19 --> L11 --> E17 --> L7 --> E19 --> EM
Thus the top 23 vote-getters (by the 600,000 voters) are selected, from whom 7 are chosen by lot. These lucky candidates, who now serve as electors, then elect from among all the candidates except themselves 19 electors, who are whittled down by lot to 11. These elect 17 electors from the candidates except themselves, who are whittled down by lot to 7. These final seven then elect 19 final electors except themselves, who proceed to elect the Representative from among all the candidates except themselves.

This should probably be done online at a scheduled time, if an online election can be made secure, rather than trying to get all the elector/candidates to meet physically at one or more scheduled times. The last two steps at least need to proceed quickly enough that no deals can be done between or during them. With reliable connections and good user interface design it should go quite fast. The preceeding election steps should usually include time and communications channels for debate and research, but not enough time to forge the social relationships often necessary for reliable favor purchase.

I've used prime numbers based on a possibly superstitious analogy to the use of prime numbers in cryptography or by cicadas, i.e. on the hunch that prime numbers will make each step less predictable than with factorable numbers. The process of signing up to be a candidate must be very easy, so that we can get large numbers of people signing up to run in even small elections. The fact that they double as both electors and candidates who might get elected to office increases the motivation to become an elector/candidate. A further benefit is that electors, themselves elected, can prevent a demagogue from being chosen, while the election cycles make it less likely than in a pure lottery for a whacko or incompetent to be chosen.

Wednesday, March 19, 2008

Comments on the United States Constitution (iii)

Our Constitution, while admirable in many respects, has some deep flaws, especially the federal court structure. But given the flawed court structure, it has developed one very redeeming feature: the Incorporation Doctrine. Under this doctrine, said by the Supreme Court to be implied from the 14th Amendment clause requiring States to respect due process, the federal Bill of Rights is applied as a limitation on States. This doctrine has allowed federal courts to enforce many individual rights against state governments, which state courts have far less incentive to do, even though similar or the same rights are written into most state constitutions. Combined with the doctrine that the Bill of Rights means the same thing when applied to States as they do when applied against the federal government, (the Same-Scope Doctrine -- an assumption that on original meaning grounds is perhaps flawed), it has also given the federal courts far more incentive to enforce the Bill of Rights against the federal government itself.

A brief further explanation of the basic flaws in both federal and state courts are in order. These courts are selected by the legislatures and executive whose power they interpret. This gives a strong selection bias (similar to adverse selection in economics, but involving the choices of third parties). When on the bench, operational bias (analogous to moral hazard in economics) biases verdicts towards increasing both federal power and the rights of other parties as narrow exceptions to those powers in order to increase the number and importance of disputes, and thereby increase the importance of the federal courts. The same logic applies to state courts interpreting the powers of state legislatures and executives under state constitutions.

An example of selection bias at work: you will almost always see Senators ask judicial nominees their opinion on the Commerce Clause. To be approved, the nominee cannot declare an intention to overturn preposterous interpretation by which "commerce among the States" includes growing marijuana or wheat in your own backyard for your own consumption. If a nominee does not declare allegience to this legal monstrosity, which has vastly increased the power of the President and Senate, most Presidents and Senates will not allow him on the federal bench. (The occassional joker, like Justice Thomas, does slip past both the President and Senate, but it's very rare).

Before the Incorporation Doctrine and the same-scope assumption, federal courts rarely enforced the Bill of Rights against the federal government. They enforced the small handful of limitations on the States in the original Constitution far more zealously. The combination of selection and operational biases produces this result -- the federal courts want to inrease their influence by enforcing rights, but have to commit to Senators (and often the President) who select them to not enforce them strongly against federal legislative or executive acts. They don't need to commit to States -- the States are not a source of selection bias -- so they can exercise their power freely by enforcing rights against the States.

Thus the federal courts have always been eager to enforce individual rights against the States, but very reticent to do so against the federal government. The Incorporation Doctrine and the same-scope assumption cause the federal courts to enforce the Bill of Rights against the federal government, going against their selection bias, as a price they are willing to pay to enforce a larger set of rights against the States.

A much better solution for keeping governmental powers in check and rights protected would be to have federal courts interpret state constitutions, and set up a new super-federal court, selected completely independently of federal politicians, to interpret the U.S. Constitution. Until such radical modification, the Incorporation and Same-Scope doctrines are crucial to incentivizing federal courts to enforce the Bill of Rights today.

Wednesday, March 12, 2008

Logic and Legal Drafting 101

In common English, "or" and "and" are often ambiguous. "Or" can mean either inclusive or exclusive or, among other things. "And" often means set union, which might correspond to either inclusive or exclusive "or" or logical "and." For example, "choose from a box containing X and Y" might mean "choose X or Y" (inclusive), "choose X or Y" (exclusive), or "choose X and Y" -- depending on whether you get to choose once, once or twice, or you must make two choices. There are any number of other ambiguities that arise when trying to deduce the logic, if any, behind many plain English uses of "and" and "or."

Nevertheless, it's not hard for a legal drafter to make the logic of a legal document clear. This should be Legal Drafting 101, a class which should be required in all law schools: use "X or Y, but not both" for exclusive or, "X or Y, or both" for inclusive or, "both X and Y" for logical and. It would probably save billions of dollars and many erroneous decisions per year if lawyers followed these three simple drafting tips. For that matter, technical writers and any other writers trying to make logical relationships clear might benefit from this advice.

Link here for a hilarious thread of some of America's smartest lawyers trying to decipher a Supreme Court opinion and decide whether it breaks one of De Morgan's Laws -- not (A or B) = not A and not B (where the "or" is inclusive). It may depend on what the meaning of "or" is.

Thursday, March 06, 2008

Comments on the United States Constitution (ii)

The United States Constitution is often lauded as the epitome of freedom. And indeed, the U.S. has for most of its history sat far towards the "more free" end of the spectrum of actual governments. The original Colonies, Articles of Confederation, and the first hundred years of the United States Constitution were, with some glaring exceptions, among the most libertarian of governments in human history, and far more libertarian than the modern United States. The actual text of our Constitution, read straightfowardly under standard English definitions, or read as most lawyers read it when enacted, is (with the exception of the Sixteenth Amendment, the income tax) a fringe libertarian document. Of all the 2008 Presidential primary candidates only the libertarian Ron Paul could credibly base his platform on the actual text and original meaning of the Constitution. The positions of all the other major candidates, as well as the interpretations of most of our Supreme Court justices, depart very far from the actual text in its original meaning.

But our Constitution is nevertheless deeply flawed. In a number of ways it facilitates our slow slide into socialism and tyranny. It is rather easy for Congressmen, Presidents, and federal justices who wish to interpret it as granting broad powers and narrow rights to do so, and they have been doing so ever since the Constitution was enacted. A wide variety of other constitutional mechanisms and institutions would do a far better job at slowing and reversing the death of liberty in the modern world.

Much of the early liberty of the American Colonies and the early United States was, as Adam Smith observed, due to low exit costs. Farming was the dominant economic activity, and the availability of free land out West made it relatively easy for a farmer to move if the local conditions got too oppressive. Officials had to preserve liberty to keep their populations. Nevertheless, our Constitution among other factors kept the U.S. more libertarian than Russia, which also had a large frontier. Our Constitution slowed, but did not stop, the aggrandizement of power into effectively unaccountable and increasingly oppresive forms. While there are many more ways to make it worse than to make it better, and this author does not recommend constitutional convention or military coup, those trying to set up new constitutions, or amend their old ones, should observe that there are a number of crucially important ways in which the U.S. Constitution can be improved upon.

Speaking very broadly, the general problem with our Constitution is that it allows the rise of a fully sovereign and monolithic federal power. Such an entity inevitably aggrandizes its power and ultimately cannot make credible commitments to protect property or any other rights or powers that it covets for itself. This is a common flaw of modern constitutions, but there are a number of protective mechanisms which these constitutions do not employ, or employ incorrectly, that could be brought to bear to correct this general problem.

A bit more specifically, here are most of the major flaws in the U.S. Constitution:

(1) The legislative branch is too powerful: several of the grants of power in Article I are too broadly worded and the rules for interpreting them are insufficiently strict. Once legislatures have achieved broad powers, they can hardly be expected to vote to give those powers up. It's a one-way ratchet towards socialism and tyranny.

(2) The executive branch is too powerful: executive duties are not well defined and the non-delegation doctrine is not enforced, allowing the rise of permanent unelected lawmaking bureaucracies. (In many practical ways the real constitution the post-New Deal U.S. operates under is the Administrative Procedures Act, augmented by things like Chevron deference).

(3) There is far too much use of elections and far too little use of lotteries. A number of officials should be chosen by lottery (as in ancient Athens) or by a sequential election/lottery cycle (as in the Venetian Republic). Lotteries can be very good at solving public choice problems, such as the problem of concentrated lobbying during elections which trump widely distributed preference.

(4) One of the two gravest defects lies in how courts are structured with respect to the constitutions they interpret. A basic design pattern for good government is that officials should not be interpreters of their own power. Allowing federal courts to interpret federal powers and state courts to interpret state powers has led to inevitable aggrandizement of the powers of both: to broad interpretations of power-granting clauses. Vague constitutional language, which is practically inevitable, would not lead to tyranny if the judiciaries who have final say interpreting these clauses did not have incentives to expand these powers. This effect is exacerbated by allowing the legislature and executive to choose the judges. I am afraid that, for example, Professor Barnett's proposal for convincing federal courts to (in many ways return to) libertarian interpretations of our Constitution, desirable as such interpretions are, is nevertheless futile. Incentives operate to select judges who profess broad interpretations of power, and while sitting on the court for judges to further aggrandize governmental power. Our judicial structure is another one-way ratchet towards tyranny.

A much better (but hardly the only better) proposal for selecting judges: select judges for lower courts by lottery from among lawyers who have scored in the upper percentile on the state bar exam and have been practicing for at least 5 years. Select judges for higher courts by a lottery over the judges of lower courts who have at least five years experience on the bench. Judges can still be impeached and removed for by legislatures or independent tribunals for egregious illegal behavior, but the executive and legislature play no role in selecting judges in the first place. This makes the judiciary far more independent of the executive and legislative branches.

The basic structure of courts in the American colonies was far better than our structure under the Constitution. There, the Privy Council, not colonial courts, had the final say in interpreting colonial charters. Being more dependent on Parliament and the Crown than on the colonial legislature, it had no incentive to aggrandize the power of the colonial legislatures. There were also a number of flaws in colonial government, including deep flaws in the British constitution that allowed the rise of Parliamentary sovereignty, which both compromised the independence of the Privy Council and trespassed on colonial legislative powers. There was also the practical problem of distance that made appeals to the Privy Council in London far too infrequent. But the basic appeals structure was far superior to that of our current Constitution. The colonial court structure will work far better now without the delay problem and if the highest court is not itself tied to a legislature.

(5) The other of the two gravest defects is the lack of unbundled political property rights. Federalism and separation of functions are two very good, indeed crucial, features of the Constitution, but they are insufficient for protecting liberty. Unbundled rights to engage in narrow forms of coercive legal procedure are often a far better way to distribute power than hierarchical federalism and separation of powers in an entity that is supposed to be in totality sovereign. The gothi of medieval Iceland, often cited by anarcho-capitalists, were an example of a political property right. Medieval and Renaissance England was a world full of polycentric, or highly distributed, political property rights, but these were swallowed up by legislative powers in colonial America. We must revive this very important and legally mature method of distributing political powers. Many legislative, executive, and judicial functions should be granted to private entities as political property rights, with the jurisdictional boundaries and procedural standards defined in those rights to be enforced by an extraordinary court independent of all other governmental entities.

(6) Insufficient protection is given to, and scope allowed for, choice-of-forum and choice-of-law clauses. Much, though by no means all, law could be entered into by contractual agreement, allowing for healthy forms of legal competition in certain areas, such as contract and family law.

Wednesday, March 05, 2008

Logical emergence of money from barter

The ever entertaining and informative Mencius Moldbug presents a useful but flawed account of the logical origins of money. By "logical origins" he means the following:
The basic problem with Menger's approach, from my perspective, is that he's concerned with the historical origin of money, whereas I am concerned with its logical origin. What Menger wanted to know is how money actually happened. What I want to know is how it can happen.
Whatever his intentions, Menger's account today has much more value as a logical than a historical account of the origins of money. Thanks to modern archaeology we now know that money (or at least goods that before the rise of coinage were valued primarily as intermediate goods, which I call "collectibles", the main example being bead jewelry) emerged long before the efficient markets that Menger assumes. Humankind thus did not, with the exception of certain short and exceptional situations during the colonial era, ever pass through a stage of efficient barter markets that is Menger's setup. Indeed so long ago (more than 100,000 years ago) did collectibles start being used that they probably played an important role in the evolution of human cooperation, as I describe here.

But let's get back to the logic of whether and how money will emerge in a voluntary and efficient barter market. Moldbug first gives a great description of why money is not like a normal commodity:
...since buying and selling any good cannot fail to affect its price - ie, its exchange rate against other goods - we have a feedback loop. The herd selects an intermediate good based on its predicted exchange rate. But the exchange rate cannot be predicted without knowing the herd's selection. Problem!
Moldbug describes his setup world of Nitropia, in which the storage and transport costs on which Menger based his analysis are eliminated:
anyone can trade with anyone, anywhere, by teleporting goods. In addition, we'll assume that all goods can be stored perfectly without any overhead.
Moldbug calls this an equilibrium where there is no money, just barter. I don't agree -- given the mental transaction cost assumption (see below), money could emerge even here, in the complete absence of storage and transport costs. I'll explain why below.

Moldbug then breaks this barter equilibrium by introducing a good with a storage cost, fish, which rots if not soon eaten. Sven the fisherman wants to fish, sell the fish, save the income, and when he's saved up enough buy a Cadillac.

Moldbug claims that this eliminates the coincidence-of-wants problem from his scenario, but I don't buy it. A coincidence of wants problem is just what we have here: customers want to eat the fish while it's still fresh but Sven does not want to purchase the Cadillac until he has saved up enough income for it (he apparently prefers delaying gratification to incurring the interest costs of credit).

Since the storage and transport costs of intermediate commodities are still zero, these provide no reason for Sven to choose one particular such commodity over another as a currency. But because as Moldbug says, "[t]ranslating between standards is a pain in the butt," out of these intermediate commodities a single monetary standard will emerge. In other words, Nitropia assumes transaction costs that create an incentive to converge on one currency. Since Nitropia has costless storage and transport, this is just what I have called mental transaction costs -- the costs involved in making buying and selling decisions. These include the costs of keeping books and otherwise tracking and comparing prices, and the costs of mentally mapping preferences to budgets via prices.

But mental transaction costs are a problem even if there are no commodities like fish with storage costs. A world of pure barter has O(N^2) prices for N commodities, and the mental transaction costs in such a world are correspondingly much higher than a world with a single currency and O(N) prices. So even a market with no transport or storage costs for any commodity whatsoever, but with sufficiently high mental transaction costs, will converge on a single currency.

Not even the elimination of all storage and transport costs eliminates all coincidence of wants problems. If Sven's customers want the fish Sven caught today because they are hungrier today than they expect to be ten years from now, they will prefer to buy it today even if Sven could costlessly store the fish to be sold with equal freshness ten years from now. Even with zero storage and transport costs, time preferences for production and consumption create noncoincidences of wants, and these mismatches combined with mental transaction costs give rise to a currency standard.
Menger's analysis does not and cannot show that the coincidence-of-wants effect is the only force that can result in standardized money. Perhaps there is another? Indeed there is.
I disagree. What Moldbug's argument, properly corrected, shows is that some of the costs that arise from the noncoincidence of wants occur even if there are no transport or storage costs, but only mental transaction costs. This contrasts with Menger's analysis, which defined the costs caused by the coincidence wants in terms of transport and storage costs.
Suppose Sven is choosing between only two possible intermediate goods - Ia or Ib. Say Ia is palladium, and Ib is rhodium. What is Sven's algorithm? It's actually quite simple. All Sven cares about is the change in the exchange rate between palladium and rhodium, across the time window T1 - T0 of the transaction. If (Ia/Ib)@T1 is greater than (Ia/Ib)@T0, he prefers palladium. If it is smaller, he prefers rhodium. In other words, he will prefer the I which will appreciate more across his monetary time window...

[Now consider a population of Svens, each choosing an intermediate commodity]. Let's separate this herd into two strategies, by eye color. If Svens have blue eyes, they follow their proper MBA reflexes and diversify, buying equally priced lots of palladium and rhodium. But if they have brown eyes, they buy only rhodium.

Who does better? The brown-eyed Svens. Why? Because [the introduction of a commodity that can't be costlessly stored [but as I observed above this is not really necessary; what we need to introduce are coincidences of wants and mental transaction costs -- NS]] has created new demand for both palladium and rhodium. There was no monetary demand before we broke the equilibrium - now there is. Ceteris paribus, the price must go up.
Rhodium emerges as our standard, its price reflects its value as money on top of its value as an industrial commodity, and the price of palladium goes back to its mere value as an industrial commodity. Given the vagaries of markets, our blue-eyed MBAs would have bought palladium too high (anticipating the possible increase in its value as money if it would have become a monetary standard) and sold too low (as glut and bust will follow this monetary bubble), while the brown-eyed colluders reap the full benefits of investing early in the money standard that actual emerged.

But if we take this analysis further, our blue-eyed MBAs don't come off nearly as bad as Moldbug's scenario suggests. If mental transaction costs, in addition to storage and transport costs, are sufficiently low there is no convergence on a single currency, because in a world of sufficiently unpredictable and volatile prices and risk aversion a party indeed benefits from stockpiling multiple currencies, just as they teach MBAs about investments.

In Moldbug's competition of blue eyes versus brown, the dice were loaded: the agreement between brown-eyed Svens to standardize on rhodium, and the lack of any attempt to set up a competing standard, allowed parties who knew about the agreement to predict ahead of time which standard would win. If the outcome is significantly predictable, it pays to invest completely in the most likely winner. But let's add a third group: green-eyed Svens that use just palladium as their intermediate commodity. Green and brown eyes being of the same expected financial size (or of a completely unpredictable financial size), there is a 50% chance that palladium and green eyes will win, while brown eyes lose everything (except the original non-monetary value of the commodity, presumably negligible), and 50% chance of the reverse. For the blue eyes, if they diversified evenly it's basically a wash. The risk-neutral expected value of all three groups is the same, but if our players are risk-averse our blue-eyed MBAs have the strategy of highest expected value. 50/50 diversity is thus the optimal initial position when it cannot be predicted which of two commodities will gain value as money. But since it's impossible to discover a perfect 50/50 diversification, and mental transaction costs are sufficiently high, the equilibrium is unstable and will coverge to a single currency. Once one commodity starts to be favored, the optimal strategy is to move to that currency. So we have shown that sufficiently high mental transaction costs are sufficient to cause the emergence of a currency standard, even in the absence of storage and transport costs.

Reminder: we are neglectling coercive means such as legal tender laws and operating in a completely voluntary market. But Moldbug's scenario also explains why larger governments usually end up controlling the currency, even in the absence of legal tender laws. Markets will tend to standardize on whatever the dominant transactor, the party that controls the largest plurality of cash flow, standardizes on, and in most historical societies the dominant transactions were tax collection and the payment of those taxes to soldiers. More recently government bonds and even more recently welfare payments have joined the fray, biasing the outcome still further. By standardizing on its own currency, a large government can gain revenue from an "inflation tax." This process is far easier for the government with a fiat currency than a currency based on natural unforgeable costliness (such as a precious metal). Before the advent of modern currencies, inflation and the resulting revenue could only be obtained tediously via the slow substitution of less scarce for more scarce metals in the government coinage. With paper the physical process is trivial, and only the matter of how the new money enters the economy is at issue.

All the foregoing assumed sufficiently high mental transaction costs. This has been the historical norm, because trying to shop or otherwise do business in a world of multiple currencies, much less of pure barter, has always led to confusion, error, and overly complex accounting, and would do so even given the costless teleportation of Nitropia. But with sufficiently low mental transaction costs and sufficiently unpredictable exchange rates, it pays to hang on to multiple currencies, and a world of multiple currencies is the equilibrium. At the extreme of zero mental transaction costs, zero storage costs, and zero transport costs, we have a pure barter market, with no need for money at all.

Now for a more radical claim: in some cases, computers can drastically reduce the mental transaction costs of comparing prices in multiple currencies, which along with the "costless teleportation" of online markets allows multiple currencies or in some cases even barter to become the equilibrium. I'm quite a bit more fuzzy on just what those circumstances are, or just what software with what user interfaces said computers must be running, but you can see some of my ideas here and here. The general idea is that most of the mental costs of mapping of preferences to budgets via prices, in order to make buying or selling decisions, are offloaded onto a software agent, via a user interferface and a complier that translates high-level preferences to detailed "binary" contracts.

Saturday, March 01, 2008

Comments on the United States Constitution (i)

This is the first of a series of comments on the United States Constitution, with some riffs thrown in about U.S. history generally.

We start on the eve of the American Revolution. England had colonized a wide variety of places on the globe under three general models: proprietary, corporate, and royal. All three occured on the East Coast of North America in the original thirteen colonies that became the United States.

Royal colonies were technically part of the royal administrative hierarchy, but they were the least common type. The most common type was the corporate. Corporations ranged from Church organizations (like abbeys) to municipalities ("boroughs") to, most important for our purposes, the colonial corporations. The East India Company, one of the first joint stock companies, is the most famous and powerful example of a colonial corporation, but most other English colonies and a number of the American colonies were also granted in this form. Proprietary colonies were modelled after Counties Palatine: counties that were, except for a handful of narrow "extraordinary writs", immune from the jurisdiction of King and Parliament.

Unlike modern economic corporations, both corporate and proprietary colonies were granted political property rights. These are rights to exercise coercive police powers: to collect taxes, to make and enforce certain kinds of laws. Traditional political property rights, called franchises, were narrow grants to exercise very particular kinds of police powers. The grants to colonial corporations were often much broader and vaguer, granting rights of "government" or "internal police" while reserving "the rights of Englishmen" to colonists. Furthermore, the distance of their operation from the Crown and Parliament, and absentee colonial governors often lent colonists a free hand in governing, which they tended to do through legislatures elected by owners of real property. Although under long English legal precedent corporate charters, and especially charterted political powers, are to be interpreted narrowly, the broad wording of many of the colonial charters made this hard to do.

Some colonies (such as Virginia and the Carolinas) lost their corporate or proprietary status through quo warranto forfeiture proceedings and became royal colonies. Others through quo warranto had their charters reissued in new forms. In both cases, governors usually came to be appointed by the Crown and local legislatures gained broad powers of lawmaking on the subject of the "internal police." But, as long as the charters were considered political property rights, no entity was sovereign -- neither the Crown, nor Parliament, nor the legislatures could exercise political power at will, but had to respect the political property rights; i.e. had to operate according to the colonial charter.

The Romanist worldview is an ancient and pernicious one, and its reassertion in the 18th century in English politics led among many other things to the American Revolution. The Romanist view dates back to the Roman Empire, and came to the modern world via the Code of the Empereror Justinian. This Code was revived in the West by the new law schools (later universities) of the 12th century and became the standard law taught at Continental medieval universities. England's universities, by contrast, did not teach the standard English law (common law) until the middle of the 18th century. Instead, the standard English legal education occurred at the Inns of Court, and taught a legal and political structure radically different to Justinian's, one unintelligible to the typical university legal scholar or political philosopher. Even though real law by that time differed widely from the Justinian Code, the Code has exerted an influence that slowly caused, first Continental, and then worldwide, political philosophy and then law to coverge on its model. The Napoleonic Code and most other modern European codes are modelled after Justinian's.

From the Justinian Code we get two totalitarian superstitions: first, that there must be a locus of power, a "sovereign", somewhere in any political system. In Justinian's Empire, this locus was the emperor himself, whose word was law. From this philosophy came the view of the sovereign king or dictator espoused by Bodin and Hobbes. In this model the king is the "head" and the rest of the "body politic" is controlled by the king, just as our brains control our bodies. Under Rosseau and Bentham, this locus was switched to "the people" or to, in practice, a parliament that supposedly represented "the people." Under the extreme sovereigntist view, separation of powers, federalism, and political property rights are all an illusion -- all power is just a revocable delegation from a supreme locus of sovereignty.

Actual English law and political structure were very different. Under this law, royal power was actually divided among the King, the King's counselors, Parliament, and justices. None of these entities was the "locus" of power but all played crucial roles. Furthermore, much of this power had been granted to other entities -- nobles, lords proprietor, municipal and colonial and church corporations, guilds, and so on -- in the form of largely irrevocable political property rights. Under the sovereigntist view, taught in universities, all such property grants were merely revocable delegations. But under the actual common law, taught to the actual lawyers and judges of the time in the Inns of Court (institutions completely independent of universities, and thus largely uninfected by Roman Law), these delegations were property rights forfeitable back to the grantor -- and the original grantor was the Crown -- only under extreme breach of grant conditions under a quo warranto proceeding.

The substantive law of Justinian's Code is quite valuable, containing a purely economic view of property championed by, among others, Adam Smith, and giving rise to our efficient modern capitalist economies. But its procedural law is utterly totalitarian and helped give rise, first to the totalitarian Kings and Czars, then to Napoleon, and then to the communist and fascist dictators of the 20th century. The English legal world largely avoided this fate, but the freedoms of its peoples have been undermined by its own creeping Romanism in the form of legislative sovereignty. The political philosophies and "political science" of universities have always been dominated by the sovereigntist paradigm, which pits sovereign government versus "anarchy" as our only political alternatives. When the Inns of Court gave way to universities in teaching English law, English legal philosophy and political structure too became increasingly Romanist.

Of the legal claims made by the American Revolutionists, the strongest and most credible was their argument that the novel assertions of parliamentary sovereignty under Lord North violated the colonial charters. But by that time American colonists, too, were under the spell of Rosseau's doctrine of legislative sovereignty. Samuel Adams reported on the eve of the Revolution, trying to square the circle, that is to reconcile the supposed "supreme power" (sovereignty) of Parliament with the political property rights granted by the charters:
[Governor Hutchinson arguing on behalf of Parliament] although ... there must be one supreme authority [Parliament] ... , this constitution [Massachusett's colonial charter] will admit of subordinate powers, with legislative and executive authority, greater or less, according to local and other circumstances." "This is very true," the council [per Samuel Adams] replied, "and implies that the legislative and executive authority granted to the subordinate powers, should extend and operate, as far as the grant allows; and that, if it does not exceed the limits prescribed to it, and no forfeiture be incurred, the supreme power has no rightful authority to take away or diminish it, or to substitute its own acts, in cases wherein the acts of the subordinate power can, according to its constitution, operate. To suppose the contrary, is to suppose, that it has no property in the privileges granted to it; for, if it holds them at the will of the supreme power, ... it can have no property in them.... But, as in fact, the two powers are not incompatible, and do subsist together, each restraining its acts to their constitutional objects, can we not from hence, see how the supreme power may supervise, regulate, and make general laws for the kingdom, without interfering with the privileges of the subordinate powers within it? [emphasis added]

Since the sovereignty of Parliament was unacceptable to the colonists ("no taxation without representation"), and centuries of Romanist propaganda had by then extinguished almost all knowledge and recognition of political property rights beyond the Inns of Court, distribution of powers survived in the United States in only two forms: federalism (the nesting of larger and smaller territories, each with separate jurisdictions) and separation of powers (per Montisque, the separation between executive, judicial, and legislative powers). "Sovereignty" still had to be located somewhere. At first, during the Articles of Confederation period, colonies were dubbed "States" and declared by many to be sovereign. But even under the Articles of Confederation this was a fiction -- the Congress, not the States, sent diplomats abroad, and the "States" had delegated military authority to a confederate army led General Washington. As we shall see, the United States Constitution would render any talk of state sovereignty completely a matter of fiction, and it rivalled another fiction that would dominate in the long run -- that it was not any real entity, but a romantic fiction called "The People" that were sovereign. Using this fiction, the nature of the United States Constitution as a fictional grant of political property rights can be elucidated. Here is the preface to the Constitution, not legally binding, but illuminating of its nature:
We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

The Constitution proceeds to list a number of legally binding Articles, just as in a corporate charter. "We the People" was in fact a small cabal of delegates sent from state legislatures, who had only authority to amend the Articles of Confederation, not to unilaterally rewrite the rules under which said Articles could be amended such that they effectively scrapped them and started over. But with concepts like "We the People" blazing across the mental sky, who needs legal propriety?

Nevertheless, this nice fiction allowed the United States to avoid creating a real locus of sovereignty by creating a fictional sovereignty to satisfy the Romanists. Sovereignty, under this doctrine, is vested in "We The People." Some of this political power is granted, charter-like, to the United States federal government. The rest is granted (per the 10th Amendment) "to the States, or to the people, respectively" -- that is to each State and to individuals. In reality, political power is distributed amongst the federal government, states, counties, and munipalities, with a variety of enumerated and unenumerated rights that these governments may not infringe being retained by private persons. Meanwhile, though, political property rights, which had been central to the colonial charters on which the United States Constitution was modelled, had been forgotten here, and indeed in England outside of the Inns of Court and the now-obscure passage on franchises in Blackstone's Commentaries. The three main safeguards against totalitarianism in the United States would be federalism, separation of powers, and the Bill of Rights.