Legal foundations of capitalism (classics in economics)

FOUNDATIONS
OF CAPITALISM


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LEGAL
FOUNDATIONS
OF CAPITALISM
J O H N R. C O M M O N S
With a new
introduction by
JeffE. Biddle &
Warren J. Samuels

¡3 Routledge
j j j ^ ^ Taylor & Francis Group
LONDON AND NEW YORK

Originally published in 1924 by The Macmil-lan Company
Published 1995 by Transaction Publishers
Published 2017 by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
711 Third Avenue, New York, NY 10017, USA
Routledge is an imprint of the Taylor & Francis Group, an informa business
New material this edition copyright © 1995 by Taylor & Francis.
All rights reserved. No part of this book may be reprinted or reproduced or
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Notice:
Product or corporate names may be trademarks or registered trademarks,
and are used only for identification and explanation without intent to
infringe.
Library of Congress Catalog Number: 94-12484
Library of Congress Cataloging-in-Publication Data
Commons, John Rogers, 1862-1945.
Legal foundations of capitalism / John R. Commons; with a new introduction
by Warren J. Samuels and Jeff E. Biddle.
p. cm.
Includes bibliographical references and index.
ISBN 978-1-56000-781-4
1. Law-Economic aspects. 2. Capitalism. 3. Value. I. Title.
K487.E3C65 1994
340'.11-dc20
94-12484
CIP
ISBN 13: 978-1-56000-781-4 (pbk)

To M Y FRIEND

CHARLES R. CRANE



CONTENTS
INTRODUCTION TO THE TRANSACTION EDITION
PREFACE

ix
XXXV

CHAPTER I.

MECHANISM, SCARCITY, WORKING RULES

CHAPTER I I .

PROPERTY, LIBERTY AND VALUE

11

CHAPTER III.

PHYSICAL, ECONOMIC, AND MORAL POWER

47

CHAPTER IV.

TRANSACTIONS

65

CHAPTER V.

GOING CONCERNS

143

CHAPTER V I .

THE RENT BARGAIN—FEUDALISM AND USE-VALUE

214

CHAPTER V I I .

THE PRICE BARGAIN—CAPITALISM AND
EXCHANGE-VALUE

1

225

CHAPTER V I I I . THE WAGE BARGAIN—INDUSTRIALISM

283

CHAPTER I X .

313

INDEX

PUBLIC PURPOSE

389



INTRODUCTION TO THE TRANSACTION EDITION
I
John R. Commons was born in Hollandsburg, Ohio in 1862 and
died in 1945. Religion was an important element in Commons's up­
bringing. The Calvinist faith of his mother, who appears to have been
the more influential parent, included the sort of theologically inspired
enthusiasm for social reform that later found expression in the Social
Gospel movement. Commons, at least as a young adult, lived out his
mother's principles, becoming active first as a student and later as a
faculty member in various religiously inspired social reform organi­
zations. In the 1890s Commons joined with other prominent Ameri­
can economists such as Richard T. Ely and J. B. Clark in arguing that
successful amelioration of social problems would require a partner­
ship between social scientists and the Christian clergy. Commons's
views on this matter are found in his 1894 book Social Reform and
the Church. Explicit discussions of Christian doctrine and the social

role of the Christian church would disappear from Commons's writ­
ings after the early 1900s, but he never lost his commitment to reform.
Commons differs from most well-known economists in that the story
of his education is not one of academic accolades and outstanding achieve­
ment. After completing high school he attended Oberlin College, where
he failed courses and suffered a nervous breakdown, barely managing to
graduate. His troubles stemmed in part from an inability to adapt to the
standard methods of instruction of the day, which stressed memorization
of material laid out in lectures and approved textbooks. Commons's au­
tobiography includes an account of his experience studying biology at
Oberlin. While other students were examining a series of specimens ac­
cording to a prescribed regimen, Commons devoted his time to analyz­
ing a water bug he had found in a ditch by the road. He ultimately failed
his biology exam, but passed the course anyway, presumably as a re­
ward for his "stubborn curiosity."
In spite of Commons's marginal performance at Oberlin, the in­
tervention of one of his professors allowed Commons to attend gradu1


X

LEGAL FOUNDATIONS OF CAPITALISM

ate school. Commons enrolled in Johns Hopkins University in order
to study economics under Richard T. Ely, whose sympathetic writ­
ings on labor unions had been brought to Commons's attention. Ely's
empirical, interdisciplinary style of teaching Political Economy and
his habit of involving students in fieldwork projects were well suited
to Commons's interests and aptitudes, and Commons made a posi­
tive impression on Ely. His academic troubles continued in other

courses, however, and he was never able to complete his Ph.D.
Between 1890 and 1899 Commons held teaching positions at four
institutions, three of which he left involuntarily. His inability to de­
velop a teaching style that satisfied both his students and his employ­
ers contributed to Commons's professional difficulties, but more
important was the fact that his writings and his continuing involve­
ment with various reform efforts were earning him a reputation as a
radical. One noteworthy episode was Commons's debate with Ameri­
can Economic Association President A. T. Hadley, carried on during
the association's 1898 and 1899 meetings. In his presidential address
Hadley asserted that the economist interested in practical affairs could
best serve society by assuming the role of objective, impartial advi­
sor to the government. Commons responded that class struggle had
historically been the motor of social progress, and that the economist
was most likely to aid this progress through an open advocacy of the
claims of subordinate classes.
After being fired from Syracuse University in 1899 Commons spent
five years as a journeyman economist of sorts, working as a concili­
ator of labor disputes and an investigator for various private and gov­
ernmental agencies. These were important years for Commons. His
assignments allowed him to view firsthand the actions and attitudes
of businessmen, labor leaders, rank and file workers, and political
operatives; they also enabled him to hone his abilities as an observer,
chronicler, and interpreter of actual economic activity. It was also
during this period that he began to write extensively on the topic of
labor organizations and labor problems.
In 1904, Ely, now chairman of the economics department at the
University of Wisconsin, offered Commons a teaching job. Com­
mons accepted, and at Wisconsin finally found a congenial working
environment. He remained there until his retirement in 1932, com­

piling an impressive record as a teacher, researcher, reformer, and
public servant.


INTRODUCTION TO THE TRANSACTION EDITION

xi

Ely brought Commons to Wisconsin in part so that Commons could
put together a book on the history of the American labor movement
using materials Ely had collected. Commons did this and more. Work­
ing over a period of several years with the help of graduate students,
he augmented Ely's collection of primary sources with archival ma­
terial gathered from all over the country, arranging and publishing it
in 1910 in the eleven volume Documentary History of American In­
dustrial Society. These materials also formed the basis for The His­
tory of the Labor Movement, the first two volumes of which appeared
in 1918, the last two in 1935. Commons acted as editor of the latter
work, with individual chapters being written by his students. By the
time the first volumes of The History of the Labor Movement ap­
peared, Commons's writings on unions and on the problems faced
by working people had already gained him national recognition as
an authority on labor issues. He had been chosen by the President in
1913 to serve on a national commission investigating the causes of
labor unrest, and in 1917 had been elected President of the American
Economic Association. The four volume History of the Labor Move­
ment, however, secured his reputation for the future as the basis of
what came to be known as "the Wisconsin school" of American la­
bor history.
In spite of his earlier problems as a teacher Commons also earned

the respect of his students at Wisconsin. He perfected a teaching style
that drew students into whatever projects he was working on. Under­
graduates would do investigatory fieldwork and write reports, while
graduate students might take over parts of a Commons research project
(as in the case of the labor history volumes), or find themselves serv­
ing as staff members of a commission set up by Commons-designed
legislation (to be discussed below). Some Commons students, in­
cluding Edwin Witte and Selig Perlman, remained in academics and
rose to prominence within the community of research economists.
The general pattern, however, was for Commons's graduate students,
inspired by the example and aided by the connections of their teacher,
to write dissertations on empirical rather than theoretical topics, and
to take jobs in public service rather than academics. The fact that a
larger share of Commons's students did not move into academic po­
sitions may be one reason for the failure of Commons's theoretical
ideas to have an important impact on the subsequent development of
mainstream economics.


xii

L E G A L FOUNDATIONS O F CAPITALISM

Commons's passion for social reform, which had led to problems
earlier in his academic career, found a positive outlet at Wisconsin.
Shortly after arriving there Commons allied himself with Wisconsin
Governor (later Senator) Robert La Follette, who had adopted the
strategy of using University of Wisconsin faculty to render concrete,
and lend legitimacy to, his broad ideas for reform. In 1905, Com­
mons helped La Follette in drafting a civil service reform law, but a

more important effort began in 1907 when La Follette asked Com­
mons to take part in designing a law to deal with public utilities. The
result was the creation of a state commission to regulate privately
owned water and power companies. The commission had the author­
ity to set rates and levels of service subject to judicial review, and
employed a large staff of expert investigators to assist it in its tasks.
This approach to public utility regulation became a model adopted
by almost every state in the union.
Commons also played an important role in the establishment of
industrial accident compensation laws in the United States, helping
to forge the "historic bargain" through which employers accepted
full liability for work-related injuries to employees in exchange for
statutory limits on the compensation owed by employers to injured
employees. Commons's role in this movement was twofold. Starting
in 1906 Commons worked through the American Association of La­
bor Legislation (which he helped to found) to raise public awareness
of the problem of industrial accidents, disseminate information about
the problem, and propose solutions to sympathetic policymakers and
reformers throughout the United States. Working in Wisconsin, he
helped draft a workers' compensation law and establish the Wiscon­
sin Industrial Commission in 1911 to formulate and enforce stan­
dards for workplace safety. Commons served for several years on
that commission, and once again the Wisconsin legislation became a
model for legislation nationwide.
During the 1920s, Commons turned his attention increasingly to
the problem of unemployment, approaching it from two angles. First,
Commons believed that workers could be provided with insurance
against income loss due to unemployment in much the same way as
they were now insured against loss resulting from industrial acci­
dents. The recession of 1920 spurred Commons to formulate a model

unemployment compensation law. For the next fifteen years he pro­
moted his plan through his own writings, through the efforts of former


INTRODUCTION TO THE TRANSACTION EDITION

xiii

students who had achieved positions of authority, and through the
machinery of the American Association of Labor Legislation. In 1932,
prompted by the Great Depression, Wisconsin passed an unemploy­
ment compensation law; and in 1935, federal legislation led to the
establishment of unemployment compensation programs in every
state. The programs differed in many ways from the original model
proposed by Commons, but they captured one of its key features:
they were financed by experience-rated taxes, giving employers an
incentive to avoid laying off workers.
Commons also hoped to attack unemployment at its source. Be­
lieving that stabilization of the price level would contribute to
macroeconomic stability and thus diminish cyclical unemploy­
ment, he joined with Irving Fisher and other economists in sup­
port of a federal legislation that would make the stabilization of
the price level the prime goal of U.S. monetary policy. Although
the bill did not pass, Commons is believed to have been the first
economist to explain the relationship between the monetary
authority's activities in the secondary bond market (i.e., Federal
Reserve open market activities) and the money supply, which he
did in testimony before Congress in 1927.
II
Commons is today remembered as one of the major figures of the

heterodox institutionalist school of economics. Although the use of
the word "institutionalism" to label a school of economic thought
was first proposed in 1918, the institutionalist movement in Ameri­
can economic thought arguably has its origins in the last decades of
the nineteenth century. The movement reflected the influence of
Spencerian and particularly Darwinian notions of evolution on all
facets of American intellectual life, as well as the influence of Ger­
man historicism on American economics, transmitted in part through
the German graduate training received by many young American
economists during this period. German-trained economists such as
Ely are recognized as forerunners of the movement, but it has be­
come traditional to identify Thorstein Veblen as the "first" institu­
tionalist. In a series of essays published around the turn of the century,
Veblen criticized the orthodox (classical and neoclassical) approaches
to economics and described an alternative "evolutionary" approach
to the science. Around the same time, he produced two influential
2

3


LEGAL FOUNDATIONS OF CAPITALISM
books, The Theory of the Leisure Class and The Theory of Business
Enterprise, which presumably embodied this evolutionary approach.
By the 1910s and 1920s, numerous other writers were picking up
and developing themes that could be found in Veblen's work: the
fruitfulness of the evolutionary metaphor in the analysis of socioeco­
nomic development; the holistic nature of social phenomena and the
associated need for a unified or interdisciplinary approach to study­
ing social and economic questions; the sterility o f static,

nonevolutionary approaches to studying economics and of classical
and neoclassical economics in particular; the role of classical and
neoclassical economics as ideology in support of status quo power
arrangements; and the importance of empirical/inductivist as opposed
to a priori/deductivist approaches to the development and/or verifi­
cation of economic theory. Of course, these themes could be identi­
fied in the works of other nineteenth century social scientists, and
not all of those in the next generation who sounded them were ex­
plicitly following Veblen. Still, because of its high visibility, its pro­
vocative tone, and its intellectual depth, Veblen's work became a
touchstone for a generation of dissident American economists.
Institutionalism in the twentieth century also came to be associ­
ated with "interventionism" or "national planning," as various institutionalist writers proposed specific governmental actions to be taken
in response to various socioeconomic problems, or argued more gen­
erally that the government could assume responsibility for the intel­
ligent guidance of social evolution. At the same time, they challenged
the way of thinking underlying such dichotomies as laissez-faire ver­
sus interventionism, arguing that all economic arrangements, even
those idealized arrangements associated by orthodox economists with
laissez-faire, inevitably involved certain patterns of state action and
state control of the behavior of economic actors.
Commons's lifelong interest in the social and economic problems
faced by workers, his empirical research style, and his involvement
designing and promoting reform-oriented legislation would all iden­
tify him as an institutionalist. But the work that established him as a
leading theoretician of the institutionalist movement was not begun
until late in his life. Prior to the turn of the century Commons had
formulated a theory of socioeconomic evolution, laid out most clearly
in a series of articles published in 1899 and 1900 and entitled "A
Sociological View of Sovereignty." His involvement in public af-

INTRODUCTION TO THE TRANSACTION EDITION

xv

fairs and other experiences during the subsequent years led him to
refine both the theory embodied in those essays and his views on the
philosophical underpinnings of, and research methods appropriate
to, social science. Around 1920, Commons began drafting chapters
of a manuscript treating, in his words, "an evolutionary and behavioristic, or rather volitional, theory of value" (The Legal Founda­
tions of Capitalism, p. iii). The manuscript ultimately included, among
other things, discussions of the methodology of social science, the
ontology of social processes, and the social psychology of human
action; a theory of social evolution; a constructive critique of past
and present schools of economic thought; and an account of effec­
tive strategies for economic policy reform.
On the advice of his friend and fellow economist Wesley Mitchell,
Commons split the manuscript into two parts. The first was The Le­
gal Foundations of Capitalism, published in 1924. The second grew
into Institutional Economics, published in 1934. The common ori­
gin of these two works is reflected in the fact that many of the major
analytical themes introduced in The Legal Foundations of Capital­
ism are fleshed out and elaborated upon in Institutional Economics,
and an understanding of Commons's theoretical system really requires
a careful reading of both. A final theoretical work, The Economics of
Collective Action, was published posthumously in 1950.
These three books laid the foundation for "Wisconsin-style" institutionalism, today recognized as a distinct stream within the larger institutionalist movement. At a theoretical level it focuses mainly on the joint
evolution of and interaction between legal and economic processes. It is
also a distinctively pragmatic, "applied" form of institutionalism, with

an emphasis on identifying and crafting solutions to particular social
problems as they emerge. Empirical observation is seen to have a major
role to play in the formulation and refinement of theory; case study and
fieldwork approaches are valued. Finally, Wisconsin institutionalism tends
to be less critical of mainstream economics—mainstream and institu­
tional approaches are regarded as complementary, and advocates of the
former are to be faulted mainly for their failure to recognize the limita­
tions inherent in their methods.
4

Ill
From the time of their appearance Commons's later theoretical
works, including Legal Foundations, have induced frustration on the


xvi

LEGAL FOUNDATIONS OF CAPITALISM

part of many readers. On the first page of Institutional Economics
Commons acknowledges "the comments and criticisms by readers
and students of both my Legal Foundations of Capitalism and the
various revisions and mimeographed copies of this book on Institu­
tional Economics, to the effect that they could not understand my
theories nor what I was driving at, and that my theories were so per­
sonal to myself that perhaps nobody could understand them." A l ­
though the books are laid out in a highly structured outline form, it is
not always clear to the reader why topics have been ordered as they
have or even included in the first place. Familiar figures and themes
such as Adam Smith or the problem of scarcity are given idiosyn­

cratic treatments in unfamiliar contexts. Commons's frequent classi­
fication and reclassification of factors under discussion seems at times
distracting and unnecessary, and his tendency to neologize often adds
to the confusion.
The difficulties readers have with these works spring in part from
poor exposition, and in part from the fact that Commons, in attempt­
ing to synthesize insights from many disciplines (especially law and
economics), was adopting and adapting the esoteric vocabularies and
definitions of each. But another reason that the style and structure of
Legal Foundations and later works seem strange to readers is that
over several decades of observing and participating in economic ac­
tivity and the making of economic policy, Commons formulated a
philosophical and methodological outlook quite different from that
subscribed to by mainstream economists of his day and today. Once
this outlook is appreciated, many of the initially puzzling aspects of
Commons's theoretical works come to make more sense.
Commons's philosophical views and psychological assumptions
are closely related to those of the American pragmatist philosophers
C. S. Peirce, William James, and John Dewey. Commons, like these
philosophers, conceived of human activity as an ongoing attempt to
control or influence the course of future events. The meaning or value
of an action for an individual lay in his expectations of its future
consequences. Expectations were formed on the basis of past experi­
ences, and what constituted a desirable consequence depended on
the purposes or goals of the actor, also a result of past experiences
and socialization. Valuing or forecasting the consequences of an act
involved comparing a present situation to past situations and recall­
ing patterns of action that had "worked" in similar situations in the

INTRODUCTION TO THE TRANSACTION EDITION

xvii

past. Determining which past experience(s) provided a reliable guide
to present action involved choosing out of the present situation the
most salient factors, and searching one's repertoire of past experi­
ences for those marked by similar factors—the process of weighing
and classification discussed in the final chapter of Legal Founda­
tions. Whether or not the process was successful, and whether or not
the action chosen yielded the hoped-for consequences, the experi­
ence and its contextual situation became part of the individual's past,
and part of the stock of experience upon which meaning and expec­
tation would be constructed in the future.
This view of human action surfaces throughout Legal Founda­
tions in large ways and small. It is embodied, for example, in the idea
of the transaction, a concept designed to explore the implications of
the fact that in most situations the key factors or consequences about
which expectations must be formed are the actions of other purpose­
ful individuals. It provides the context for the concept of working
rules, which stabilize expectations by allowing people to predict fairly
confidently the reaction of others to specific actions in specific classes
of transactions. But for the purposes of understanding the style and
content of Legal Foundations it is important to realize that Com­
mons believed this account of human activity to hold good all areas
of life, including social scientific investigation. Theorizing about
transactions (Common's fundamental unit of social science analysis)
involved searching for similarities and differences between transac­
tions currently under study and those studied in the past. It involved
classification and labeling, that is, the grouping of transactions per­

ceived to be similar along important dimensions and the naming of
those dimensions. The groupings and the meanings of labels were
not held to be a fixed feature of the reality being studied, but tools
created by the mind of the investigator and subject to change with
the changing purpose of the investigator. In Legal Foundations these
thought processes are often made explicit, yielding the overlapping
classification schemes and neologisms referred to earlier.
Significant aid in making sense of Commons's later writings has
been provided by Ramstad's (1986) identification of Commons as a
"holist." Commons's holism involves thinking in terms of part-whole
relationships, of which he writes frequently. From the standpoint of
research practice, Commons's holism implies the use of a case-study
method: individual cases (parts) are examined in search of general
5

6


xviii

LEGAL FOUNDATIONS OF CAPITALISM

themes or shared principles that characterize the system or class of
cases from which they arise (the whole), with a belief that a study of
general themes or shared principles and their interrelationships will
bring a clearer understanding of each individual case. At a deeper
level, Commons believed that objects and processes of interest (such
as transactions or going concerns) existed and could be perceived as
both wholes made up of integrated parts and as parts interacting with
one another within larger wholes. How they were perceived in any

particular instance depended in part on the purposes, preconceptions,
and situation of the observer. The full meaning and significance of
an entity lay in the complex totality of part-whole relationships and
interactions in which it could be involved. The meaning of an entity
that arose from a single instance of perception, however, was a par­
tial meaning, a context-dependent meaning, a meaning in which cer­
tain of the potential part-whole relationships were emphasized while
others were obscured or ignored. Greater understanding of an entity
was achieved when it was encountered or considered in a variety of
contexts.
An expositional consequence of adopting the holistic view is an
apparent repetitiveness and fuzziness i n conceptualization. I n
Commons's system fundamental elements of economic life—scar­
city, futurity, the going concern, and so forth—will, because they are
fundamental, appear together or separately in a variety of different
contexts. To convey more fully the meaning of an element of the
system, Commons calls attention to its position and significance in
these different contexts. Each time a new element is discussed, defi­
nitions of previously discussed elements might be recast and elabo­
rated upon in light of their potential part-whole relationships with
the new element. The expositional style reflects a belief that a full
understanding of each element emerges only after all have been dis­
cussed and the possible relationships between them enumerated.
7

IV
Understanding why Commons adopted an unusual expositional
style unfortunately does not remove all the barriers that style might
place in the way of a modern reader of The Legal Foundations of
Capitalism. Further, there is considerable truth in Ramstad's (1986)

assertion that, as a result of Commons's holism, acquiring a reason­
ably firm grasp on Commons's framework requires one to read and


INTRODUCTION TO THE TRANSACTION EDITION

xix

reread his major works. With each reading the whole system becomes
more clear, allowing a greater comprehension of its various elements
during the next reading, and so on. Only with time does the remark­
able unity in the system become apparent.
Notwithstanding this, The Legal Foundations of Capitalism stands
on its own in many ways, and can still be read with profit. For in
addition to including a partial exposition of Commons's conceptual
framework and methodological views, which was to be expanded
later in Institutional Economics, it presents the fruits of Commons's
application of his framework and investigative methods to a number
of interesting and related questions.
Some of the questions arise in connection with public policy is­
sues and controversies current in Commons's day, and this is not
surprising. Commons viewed himself as a "constructive researcher,"
one whose work was intended to be of use in solving social prob­
lems. He claimed to have built his system out of his own experi­
ences, many of which were in controversial areas of economic and
social policy, and to be developing concepts that would serve as tools
for other constructive researchers. And, apropos of the earlier dis­
cussion of Commons's methodological views, a detailed analysis of
current controversies was seen by Commons as an appropriate way
of developing a greater understanding of larger theoretical themes.

So, in Chapter I I I , an account of the evolution through judicial
decision of the definitions of power and coercion culminates in a
defense of the constitutionality of minimum wage and maximum
hours statutes, an issue still unsettled in the United States in the mid1920s. Chapter V includes detailed analyses and criticism of a num­
ber of now largely forgotten court decisions dealing with issues of
tax assessment and public utility valuation and regulation. In Chap­
ter IX, Commons reviews and contributes to the early twentieth-cen­
tury debates over the meaning of the equal protection and due process
clauses of the United States Constitution.
The material in Legal Foundations probably considered most con­
troversial from a public policy standpoint in the mid-1920s is found
in Chapter V I I I . Here Commons recounts changing legal concep­
tions of the labor contract, and criticizes the conceptualization of the
labor contract embodied in recent court decisions. He makes clear
the practical consequences of decisions in this area: they determine
which tactics labor unions are permitted to use in their attempts to
8


XX

LEGAL FOUNDATIONS OF CAPITALISM

organize workers and engage in collective bargaining, and which tac­
tics employers are permitted to use in resisting unions. Many of these
issues would be resolved in the 1930s in a manner consistent with
Commons's reasoning, but in 1924 Commons's advocacy of the
claims of organized labor was at odds with existing policy and, per­
haps, with the views of the majority of economists.
In one sense, the historic account of legal-economic evolution

found in Legal Foundations can be seen as a basis from which to
argue that workers, through their unions, should be allowed greater
participation in the governing process, that public policy should come
to embody and be influenced by the values and viewpoints growing
up among the working classes. The absorption of labor into the de
facto governing coalition through a gradual change in the "working
rules" of the state (that is, through the redesign of legal structures
and redefinition of legal concepts) would parallel the previous ab­
sorption of first the landowning aristocracy and later the capitalist
class into the ruling classes of England.
But Legal Foundations should not be considered simply a tract
for the times, for Commons's references to contemporary issues are
embedded in discussions of larger themes that contain insights into,
and sometimes detailed treatments of, some of the deep and timeless
questions of social theory. In the tradition of Adam Smith and Karl
Marx and more or less contemporaneously with Max Weber and
Vilfredo Pareto, Commons attempted an architectonic, synthetic, and
synoptic theory of the economic system broadly understood. He did
so in a manner that sometimes parallels the theories of these other
writers—for example, in the handling of questions of power—but
which, in both its reliance on English and U.S. legal history and its
overall focus on the legal-economic nexus, is largely sui generis. In­
deed, in Legal Foundations Commons attempted no less than an ex­
planation of the major processes and elements of the evolution of the
economic system as it underwent transformation from feudalism, or
postfeudalism, to capitalism. The explanation centers on the joint
evolution of polity and economy, or more accurately, of the nexus of
legal-economic processes from which emanate what are perceived
as the economy and the polity.
Commons analyzes socioeconomic development using what he

called an "artificial selection" theory of institutional evolution. Each
institution, or customary pattern of behavior, originates in the ere-


INTRODUCTION TO THE TRANSACTION EDITION

xxi

ative attempts by individuals to advance their purposes as they inter­
act with one another. For a social institution to emerge and persist, a
particular pattern of interaction (transaction) must prove successful
enough in advancing some commonly held purposes to be widely
imitated. Further, it must meet with the approval of those who, under
the existing scheme of working rules, possess the power to permit or
forbid the pattern of action. Commons's description of the emergence
of institutions thus denies the familiar dichotomy between institu­
tions that arise from spontaneous order and those that are a product
of conscious design. Every institution reflects both the spontaneous
action of individuals pursuing their goals and the conscious attempts
of those with authority to encourage or squelch variants of transac­
tional behavior in order to advance their notions of the social or pub­
lic purpose.
In Legal Foundations Commons is particularly interested in the
processes through which a succession of capitalistic market forms
developed as the state, acting mainly through the courts, endorsed
and protected some forms of economic interaction while prohibiting
others. For Commons, markets are not merely abstract conceptions
in which the workings of the pure price mechanism can be analyzed.
Markets in the real world are a function of the institutions or power
structure that form and operate through them. More particularly, they

are a function of the legal rights generated by and through govern­
ment as conflicting interests seek advancement of their opportuni­
ties. Commons thus produces a theory of the legal foundations of
capitalism, which is also a theory of the economic foundations of
law and government, but not in the narrow neoclassical conception
of "economic."
In the analysis Commons formulates and makes use of number of
different theories and models: a model of interpersonal relations speci­
fied in quasi-legal terms, such as rights, duties, exposures, and im­
munities; a behavioristic theory of psychology; theories of social
control and social change; a theory of language and its role in the
social construction of reality; theories of system and institutional or­
ganization, especially of property, markets, governments, and busi­
ness firms; a theory of power structure and a correlative theory of
legal-economic conflict resolution; and so on.
Commons directly contradicts the conventional juxtapositions of
interventionism and noninterventionism (laissez-faire) and of meth9


xxii

LEGAL FOUNDATIONS OF CAPITALISM

odological individualism and methodological collectivism. Against
the former, Commons argues that it is not possible to meaningfully
comprehend the economy in non- or apolitical terms. The economy
is fundamentally what it is because of the uses to which the modern
state is put, and those uses are the result of conflict resolution among
actors and groups that are largely economic in character. Govern­
ment is both fundamental and important to the economic system.

Against the latter, Commons argues at least two points: first, that law
is important in determining which individuals' interests will be pro­
tected by government as rights; and second, that individuals operate
only within larger social structures and processes in which govern­
ment and other social control forces operate. Against both, Commons
argues that there is no escape from some conception of social or pub­
lic purpose in choosing between conflicting interests and claims. I f
one accepts Commons's theory, then most conventional arguments
about the economic role of government are either naive or disingenu­
ous, in either case functioning to channel the use of government even
when government is explicitly denigrated and minimized.
Unlike the neoclassical economist, Commons is not directly inter­
ested in the theory of value as an explanation of commodity prices.
Instead, he is interested in the way in which the values of various
groups within society come to be ensconced in the working rules that
govern the actions individuals can take under various circumstances.
The relative prices of commodities and labor are derivative of these.
He defines as "reasonable values" the values embodied in working
rules that emerge through the total societal decision-making process,
within which the courts and the Supreme Court in particular play a
crucial role. His fundamental point is that with changes in ideas of
what constituted reasonable behavior came changes in working rules,
and as the working rules changed, capitalism both emerged and
evolved.
V
Commons proceeds in a number of steps. Several broad themes
are announced in Chapter I . Various aspects of them are elaborated
in Chapters I I and III. In Chapters I V and V, Commons develops
further those themes in examining the transaction and going con­
cerns, respectively. He therein spells out the theoretical apparatus to

be used in Chapters V I , V I I , and V I I I , which constitute his specifica-


INTRODUCTION TO THE TRANSACTION EDITION

xxiii

tion of the historical legal foundations of capitalism. In the conclud­
ing chapter, Commons focuses on the role of changing determina­
tions of public purpose in the evolution of the working rules that
determine the economic system.
In Chapter I , Commons argues that psychology, ethics, juris­
prudence, property, and politics are all fundamentally operative—
as both dependent and independent variables—in the social
construction of the economy and thereby the relations among in­
dividuals and subgroups. He outlines his volitional theory of psy­
chology, emphasizing that action and value i n the present are
functions of expectations of the future. He describes the role of
working rules, the transaction as the proper unit of analysis, and
the formation and operation of going concerns. He urges that col­
lective decisions, ultimately those of the courts, have to be made
as to what constitutes "good or bad economy," that these deci­
sions are embodied in working rules, and that these working rules
proportion activities, conduct, and resources among individuals.
A principal focus is on the changing nature of property as recog­
nized by the courts. The original physical conception of property,
he insists, has become transformed to include concepts of intan­
gible and incorporeal property. The working rules of evolving
property enlarged the field of individual action in some direc­
tions, limited it in others. Accordingly, the theories of property,

liberty, and value embraced by the courts, sometimes erected into
metaphysical and ontological absolutes, serve as the basis for the
formulation and reformulation of rights, duties, and so on.
Chapter I I presents certain fundamental arguments regarding the
changing legal definitions of property and liberty. Commons identi­
fies the transformation from a use-value to an exchange-value con­
ception of property as critical to the formation of capitalism, and he
attributes the social construction of capitalism through that transfor­
mation to the operation of the courts. The change in the nature of
liberty is examined in part in terms of opportunity, power, and for­
bearance in the context of a broad model of interpersonal relations.
Many of these substantive changes, he argues, took place without
overt or explicit change in legal terminology. The discussion empha­
sizes the complexity and malleability of concepts such as power, lib­
erty, and opportunity, and the fallacy of treating particular
specifications of them as absolutes—natural and antecedent to and


xxiv

LEGAL FOUNDATIONS OF CAPITALISM

independent of government—usually in order to give them a selec­
tive and privileged status.
Commons also explores complex human relationships and how
they are structured by property and law. An individual's liberties and
rights are shown to be relative to both the law and the rights of others,
and to be created and recreated through the ongoing determination
of which/whose opportunities are legal and not legal. As these deter­
minations are made certain interests are given the status of property,

thereby privileging some specifications of property rather than others.
Chapter I I I further explores the transformations of legal concepts
and the creation and growth of markets. Commons identifies the trans­
formations and inversions of legal concepts as legal privileges for
the aristocracy under the Magna Carta were later interpreted, selec­
tively, into common rights, and as the prerogatives of the monarch
became constrained during the rise of republican, or representative,
government. He points to a double meaning of liberty: liberty as the
privileges of landlords and monopolists granted by the monarch, and
liberty to buy and sell. Freedom to buy and sell in the market grew
out of this common legal history and constituted part of the legal
foundations of capitalism. But it also represented one stage both in
the dualism of private rights and government action discussed in
Chapter I I and the tension between maintenance of existing law and
rights and legal change of law and rights.
The conceptual structure is exceedingly complex. Physical power
is juxtaposed to economic power. The old prerogative power of the
monarch is juxtaposed to the police power of the legislature. Prop­
erty changes "from a concept of holding things for one's own use to
withholding things from others' use, protected, in either case by the
physical power of the sovereign" (p. 52). Rights are the interests to
which government gives its protection when in conflict with other
interests. When the courts transformed the meaning of property into
exchange-value, in order to protect property against legislative con­
trol of private coercive power, they were willy-nilly protecting cer­
tain interests and not others; in each case the interest was recognized
as property over against what was not so recognized, the language
and legal theory of the courts notwithstanding. In the former system,
holding and use meant "a merely passive choice between social op­
portunities" (economy); in the new, the exercise of power in search

of enlargement (expansion) (p. 55). Apropos of coercion he estab-