Faculty Resource Centre Level 1, Cofin Clark Building (39)

AUSTRAI,I.N,,..:'

DATE RECEIVED

LAWS U(,Utsli LAWlj CODES

-T9 -*{
f

;--'

*The following section must be filled out by the student being member nominated to submit and/or collect the assignment on behalf of a group.

ut".d4r#r#nro"0

ffi:-'T
FOR OFFICE USE ONLY

DUE DATE EXTENDED DUE DATE

JY

l;

- ') ta{ t*

WORD COUNT
?9

5 7tL

ia

*All sections below must be completed. Course Code (print clearly)

Course Name

1in futt;

Ld

'"1 l'

4 ilA l

ut

i
--/

{,',0 :T t

,-il

1r-'r,"}

Assignment Number Tutorial Day

1it

Assignment Title

L.4 lv

applicable)

Tutorial Time

(if applicable) (Ptease

Name of Lecturer

Extension granted

circte):

Yes

No No

Name of Tutor Extension granted by:

Copy of written approval is atiached:

Yes

Group assignments are held under one group member's name. The group must nominate a group member to submit and collect the assignment which will only be returned to that group member. All other group members must complete the following section. Do not complete andior sign on behalf of any other group member.

Family Names of Other Group Members {please orint clearlv)

Given Names

Student lD Number

Signature

(see statement below)

J'*--'4/

PLAGIARISM: Plagtarism is the action or practice of taking and using as one's own, the thoughts or writings of another without acknowledgement. When a deliberate act of plagiarism is proven, the results of the assignment, exercise or procedure concerned may be annulied and such other action may be taken as Senate may consider appropriate in the circumstances of the case. This may result in loss of credit in a subject and/or suspension of enrolment at the University.

Student's Statement
I declare that I am the studeni whose name appears above and that this is my own original work. lt does not contain any plagiarised material and has not previously been submifted for assessment. Text that is not my own has been quoted and attributed appropriately in the references. I declare that I haqp retained a copy of this work. ln accordance with my lecturer's insiructions, I confirm that this assignment is to be submitted at the BEL Faculty Resotrce Centre, and thai I understand and will abide by the condiiions on the reverse of this cover sheet pertaining to results, assignment presentation, submission and collection.

APPENDIX I METHODS FOR HANDLING GOVERNMENT INDUSTRY MONOPOLIES

Overryiew
Each of the methods of handling monopolies and principal-agent failure in nongovernment industries may be mapped onto the government industry as shown below:

Non-sovernment industrv Structural regulation Conduct regulation

Franchising Cooperatives Competition by comparison

Government industry Separation of powers and other similar measures Bills of rights and similar measures Representative government with periodic elections Direct democracy
Federalism

Competitive restructuring

Sovereigntv markets

Structural regulation: regulatory capture

Before examining each of the methods it is necessary first of all to consider a critical feature of the govemment industry which distinguishes it from other industries: the scope for regulatory capture.

All

states employ at least some regulation. Representative govemment, direct democracy and federalism all require some regulatory oversight. There is, therefore, a need for a regulator or regulators who will inevitably be part of the government industry itself.

I submit that participants who are likely to benefit from regulatory capture will tend to play down or deny the possibility of it occurring, will tend to portray government industry regulation as an objective matter, and will advocate selection of regulators "on merit". However, several different types of evidence strongly suggest at least some subjective component in regulationl:

. .

the writings and public statements of some judges reflect the same views that their judicial opinions indicate;
some biographies ofjudges trace the ways in which their attitude toward policy is reflected in their behaviour in court;

at any one time most judges are consistent in the positions they take on particular sets ofissues from case to case, even though a court collectively might be divided on the same issues. This consistency is commonly of a type which is diffrcult to explain except in terms of personal support of particular policies. For example, even though a court might be divided on civil liberties
t
Some of these are drawn from Baum. 1989. p 136.

cases, individual judges tend to be consistent in their views as reflected in their

opmlons-;

judges are largely consistent in the positions they take on particular sets of issues from year to year, even though a court collectively might change its view over time. Again, this consistency may be of a type which is difficult to explain except in terms of personal support of particular policies;
some judges adopt attitudes in court which would be expected given their

backgrounds3;

judges sometimes state that their decision is based on personal experience;

supposedly fundamental legal doctrines which apply in one country, or at one time, are sometimes at odds with those that apply in another country, or at another time, in ways which are difficult to explain except in terms of differing personal preferences in the two countriesa or changes over times; and occasionally decisions are overturned dramatically in response to observable outside pressure on judges, or following the replacement ofjudges, in a way which indicates a change in preferences.6

I submit that the subjective nature of regulation is tacitly acknowledged in most states by their adoption of some form of structural regulation that seeks to limit the opportunity for regulatory capture. Typically, judges serving on constitutional courts
are structurally separated both from the goverTrment provider and from customers or
classes of customer.

Nevertheless, the possibility of capture still arises from several quarters: appointment ofjudges. Several cases can be identified:

unitary states (including the central government of some federations). There are few formal mechanisms available to prevent capture in the

and patterns of procedural process and pairs due ofjudges, in cases involving agreement and disagreement between substantive civil liberties. 3 For example, in 1986, Sandra Day O'Connor - then the only woman Supreme Court judge - was also the only judge to dissent from the Court's refusal to hear a sex discrimination case. (Baum. 1989. p 137.) a For example, the dramatically different application of the establishment provisions to the question of school funding in Australia and the United States. 5 For example, substantive due process, which became a fundamental doctrine of the United States Supreme Court for over thirly years before vanishing again. 6 For exampl e, Hepburn v Griswold (1870), which ruled Congress's legal tender acts unconstitutional, was ovefturned the following year n the Legal Tender Cases ( I 87 I ) in response to Congressional pressure and the following the appointment of fwo new judges. (Pritchett. 1977 . p 177.) Similarly, the Supreme Court reversed several doctrines in the space of only a few weeks in response to Roosevelt's

'Baum. 1989. pp

138

- 143 illustrates the consistency of views of individualjudges,

"court-stacking" plan of 1937.

appointment process, other than legislative approval of executive nominations in some cases;t federal states. At the sub-national level there is the possibility of a regulator appointed entirely from outside the provincial state. In Australia, the centrally appointed High Court has'Jurisdiction . . . to hear and determine appeals from all judgements, decrees, orders, and sentences . . . of the Supreme Court of any State . . ."8 In the United States, the Supreme Court, appointed by the President "by and with the advice and consent of the Senate,"e may determine cases from the States "arising under this Constitution;"I0 confederal systems. Where members of the highest court are appointed by the member states of a confederal system there is the possibility of a regulator independent of the central government. For the time being, the EU is an example of this system; and

hybrid systems. The German Federal Constitutional Court comprises judges appointed half by the Bundestag and half by the Bundesratlr, the members of the Bundesrat themselves being appointed and recallable by the Liinder governments and casting only block votes for their Land ". A similar hybrid system operated in the United States before IgI313. Judges of the Swiss Federal Supreme Court are elected by the Federal Parliament;la
removal ofjudges:
basic tenure:

for life, for example the United States Supreme Court;ls for a fixed and uniform period, for example the European Unionl6 and Switzerland;17 and for fixed but not uniform period, for example the High Court of Australia (where appointment to the age of seventy allows the
Informal processes of approval appear to be ineffective. For example, after the American Bar Association's Committee on the Federal Judiciary gave mixed ratings on two nominees in 1971 "the Nixon administration immediately retracted its acceptance of the ABA committee's presecreening." Baum. 1989. pp30-37. 8 Australian Constitution, section 73. e United States Constitution, Article II, Clause 2[2]. t0 United States Constitution, Article IIl, Clause 2[1]. tt German Basic Law, para 94(1). tt German Basic Law, Article 51. tt At which time Article l, Clause 3[] was superseded by the XVIlth amendment. to Swiss Constitution, Alticle 168. Article 148 provides that the two chambers of the Swiss parliament
have equal powers.
7

United States Constitution, Article III, Section Treaty of Rome, Article 167. tt Swiss Constitution, Article 145.
16

tt

l.

executive to select, to a degree, the period ofservice nominee);rg tenure conditional upon good behaviour (and in some cases incapacity), with good behaviour or capacity determined by:

ofa

. .

the Court itself;le or the legislature;20 and

as

availability of informal inducements to retire, such other office; and

promotion to

other influences:
size of the bench.
oorenegade

A large bench reduces the chance that a single judge" acting out of character will produce unexpected

results; the ability to enlarge the bench (fundamental to the "court-stacking" plan 1937);

siting of court in the political capital (Australia and the United States), or elsewhere (Luxembourg for the European Court of Justice). It might be expected that judges residing in the political capital - relying on local media - might be expected to be more susceptible to capture from the centre than those living elsewhere; and

the ability to limit the court's jurisdiction, and control of the court's budget and increases in judges salaries.2l

Appointment for life gives sitting judges greater scope to maximise the chances that o'Republican" their replacement will be to their liking. I submit that the reluctance of judges to resign from 2001 to 2004 may be explained by their desire to wait for a clear Republican majority in the Senate. Likewise, on this hypothesis, "Democratic" judges are likely to hold out until 2009 inthe hope that the new President will be more to their liking.
The mandatory retirement of Australian judges at the relatively young age of seventy years reduces the capacity of any particular government to entrench its appointees unless it is prepared to nominate quite young candidates. For example, for a judge to serve as long as William Rehnquist (34 years) he or she would need to be appointed at the age of 36 (Rehnquist was 47). I submit that young judges may not have firmly settled opinions, their opinions are less likely to be known, and ovet time they may be
Australian Constitution, Section 72, amended 1977. Protocol on the Statute of the Court of Justice of the European Economic Community as amended by CouncilDecision of 24 October 1988. 20 Australian Constitution, Section 72. United States Constitution, Article II, Section 4. See Tribe. 1988. Footnotep64. " Baum. 1989. pp 227 -229.
re r8

more susceptible to change under the influence of older judges on the bench. They are, therefore, less reliable for a govemment seeking to entrench its constitutional doctrines. Using these criteria it is possible to compare the scope for regulatory capture in Australia and the United States.

Appointment

Australia United States By executive' of central By directly elected executive' government with no formal of central govemment, subject

review.
Tenure

to the consent of the Senate.

To age 70
Capacity and good

Life

Conditional upon As determined by

Size ofbench

behaviour

Good behaviour

Both houses of
7

legislature

Both houses of legislature

9

Court sited in

Note:

Political capital Political capital It is relevant that the directly elected executive of the United States is drawn from a wider range of communities. Since 1949, US presidents have come from Missouri, the military, Massachusetts,
Texas, California, Georgia, and Arkansas; all Australian prime ministers in that period have come from Victoria or Svdney.

Taking all these factors together, I submit that:

. .

compared with the United States Supreme Court, the Australian High Court is more likely to be captive of the Australian central government. This is due mainly to the appointment process;
capture manifests itself most clearly in conflicts between the central government and the States governments where the Australian High Court has consistently held for the central govemment. The United States Supreme Court has oscillated between centralism and particularism;22 and

on other matters the doctrines of the Australian High Court may from time to time diverge from those of the central goverrrment, but the combination of mandatory retirement and absence of Senate approval ensures that any government that remains in power for a decade or more will be able to reshape the bench to its own liking. The United States Supreme Court may be at odds with the central government and the State governments for decades at a time.

For example, the expansive interpretation of congressional power by the Marshall court in Gibbons v 'tn Hammer v Dagenhart ( 191 8), and the reversion to Ogden (1824), the opposite extreme reached centralism (in the face of the "court-stacking" plan) in NLRB v Jones & Laughlin Steel Corp (1937). Tribe. 1988. pp 301 - 309. Since the I 988 edition, the Court appears to have swung back in favour of the States once more.

"

The capture of the Australian regulator is reflected in the fact that all members are of metropolitan origin and typically five of the seven come from metropolitan Sydney.

Structural regulation: separation of powers

The best known system of structural regulation of states is the "separation of powers" model which involves (actual or purported) structural separation of executive, legislative and judicial functions.

As discussed above, both Australia and the United States employ structural regulation ofjudicial functions.
Structural separation of the United States executive and legislature is effected in two ways:

Article I, Clause 6(2) of the Constitution which provides that "no person holding any office under the United States shall be a member of either House during his continuance in office". This prevents the President from "bribing" legislators with the promise of cabinet or other appointment during their term of off,rce; and Article I, Sections 2 and 3 which fix the terms of legislators (to 2 years for the House and 6 years for the Senate). This prevents the President from "blackmailing" legislators with the threat of election at an inconvenient time, and the possible loss of party support at any election that is suddenly called.

I submit that the effectiveness of structural regulation in allowing individual

representatives to vote independently is often underestimated. It is worth noting that in the period 1994 to 2004, when Republicans had a majority in the House but not the Senate, every single bill passing through the United States Congress - other than those unanimously approved in both chambers - required, as a mathematical necessity, at least one Republican or one Democrat member to vote against the majority of his or her party. Even with the current makeup of the Senate, it still requires at least five Democrats to tacitly "cross the floor" to vote down any filibuster

attempted by their party.

It is worth noting that structural separation of legislature and executive does not imply a directly elected president. The Swiss constitution provides that members of the House of Representatives, the Senate and the Federal Government may not be members of another of those bodies. However, the members of the Federal Government are elected for four years by the parliament "after each full renewal of the House of Representatives". Presidents are elected by the parliament for a term of one year and are ineligible for election the following year. The parliament itself is elected for a fixed four year term.23

"

Swiss Constitution, Articles 144, 168, I 75 and 176. The cabinet comprises seven members who, by a convention known as "The Magic Formult', are selected to reflect as closely as possible the proportional representation of different parties in the parliament. The result is a permanent cross-party cabinet.

In contrast to either of these systems, the structural separation of executive and legislature in Australia appears nominal in respect of the House of Representatives and marginal in respect of the Senate:
in relation to cabinet appointments, members of either chamber may become ministers of state:24 in the House of Representatives, the existence of a voting system that almost always produces a clear majority ensures that a majority of legislators will be eligible for cabinet appointment or some other rewards of office; and in the Senate, the existence of a voting system that produces a majority or a near-majority ensures that (at worst) a near-majority of legislators will be eligible for rewards, and the balance of power will be held by a few independents who may be "bought off in other ways; and in relation to the calling of elections:
the Governor-General may dissolve the House of Representatives at any time;25 and the terms of senators are f,rxed at approximately three years for half the Senate and six years for the other half. However, the GovernorGeneral may dissolve the House of Representatives and the Senate simultaneously at any time once the conditions of Section 57 of the Constitution have been met. The minimum period for satisfying Section 57 is three months.

Taking these features into account, an Australian Prime Minister may expect almost complete compliance from the House of Representatives and, at worst, a tolerable working relationship with the Senate. As suggested above, the voting system plays a role in the structural separation of executive and legislature. A system of proportional representation in the Australian House of Representatives would increase structural separation as it has in the Senate. However, neither member of the two-party duopoly would have an interest in promoting a change that would increase competition in the industry.

It may also be seen that a bicameral system contributes to structural separation. For example, the voting system for the Australian Senate could easily be changed by simple act of Parliament26 to effectively remove independent parties. Why has this not occurred? Once again, neither member of the two-party duopoly has an interest in promoting a change that might produce a clear Senate majority for the opposition. The current voting system - which generally gives the balance of power to a small number of biddable independents - may not be the major parties' preferred system
2a

Indeed, Section 64 of the Australian Constitution requires that ministers of state be members of the House or the Senate or become members within three months. 2s Australian Constitution, Section 5. 26 Australian Constifution , Section 9.

but, given a bicameral legislature, it is their most reliable strategy for ensuring consistent legislative capture.2T The lack of effective structural separation in Australia between executive and legislature will be relevant when considering the effectiveness of franchising as a means of handling monopoly power.

Conduct regulation: bills of rights and similar measures Early conduct regulation
In addition to structural regulation, most states are subject to at least some conduct regulation. In the Anglo-Saxon tradition, conduct regulation may be traced back at least as far as the coronation charter of Henry I in 1 100. In order to secure the support of the Church and the baronage, the king agreed with them to subordinate his sovereign power in certain matters affecting them.28 Although the coronation charter was not honoured, the same principle of restraint on conduct reappears a century later in the Magna Carta. King John agreed to be bound by a body of rules including not to proceed against any freeman "except by the lawful judgment of his peers or by the law of the land'',2e an early concept of "due process".
Other early forms of conduct regulation include:30

Enslish Act Criminal and Civil Justice Act Due Process of Law Act Due Process of Law Act Petition of Right Habeas Corpus Act Habeas Corpus Act

Date
135
1

I 355

First reference to "due process" by name. Claiming parliamentary supremacy

1368

1627

r640
1679

An obvious conclusion to be drawn from these early forms of conduct regulation is that they were completely ineffectual. As a means of controlling a monopoly govefirment, conduct regulation involves more than simply writing out a list of desirable behaviours: it depends on having an infrastructure to interpret and enforce
the regulations.

27

changing representation in the Senate to match representation in the House of Representatives - appears to be effectively ruled out by the final paragraph of Section 128 which requires each State to approve the reduction in its proportional representation. A further alternative stripping the Senate ofits powers - appears unlikely to succeed at referendum at least for the foreseeable future. This has led some supporters of monopolisation to suggest that the Federal Parliament should simply enact "manner and form" legislation to eflectively strip the Senate of its powers without a referendum. Winterton. 1980. 28 Prohibitions on the sale or lease of church property, limitations on exactions on the transfer of

An obvious alternative

estates, and prohibition on payment for royal consent to marriage. Jones. 1971.
2n

pl17.

Jones. 1971. p 137. 'oFlynn. 2003. p249.

English Bill of Rights

I submit that the English Revolution of 1688 represented a change in the enforcement infrastructure - by creating an effective division of power - and it was this change that gave the 1688 Bill of Righrs its longer term effect. Specifically:
the royal family's legitimacy henceforth depended on acts of parliament; parliament finally secured undisputed control of the taxing and appropriation, eliminating the ability of the monarch to act alone; and parliament itself comprised factions (reflecting factions within the state), and together with the monarch these created a three-way stand-off in which no party could seize control without the consent of one other. United States

Bill of Rights

The best known modern example of conduct regulation is to be found in the United States. Both the federal state and the States are subject to a wide range of conduct regulation. Article I of the United States constitution regulates the conduct of the federal legislature, and consequently the federal state, in such matters as suspending habeas co{pus, passing bills of attainder or ex post facto laws, and granting titles of

nobility.
The first ten amendments constituting the United States Bill of Rights greatly extended the range of conduct regulation applying to the federal state into religion, speech, press and assembly; the bearing of arms; quartering of soldiers; searches and seizures; due process of law; bail conditions; and cruel and unusual punishment. Following the Civil War, the Thirteenth Amendment and Fifteenth Amendment sought to regulate the conduct of the States in relation to race. The Nineteenth, Twenty-fourth and Twenty-sixth Amendments regulate the conduct of both the federal state and the States concerning age, sex and racial discrimination in relation to elections or primary elections.

case study

in conduct regulation: the Fourteenth Amendment

The Fourteenth Amendment stands alone because it did not seek to introduce new conduct regulation but rather to apply the federal conduct regulation to the States.31 This amendment was drafted in 1866 and adopted in 1868. The probable intention of the legislators was to extend the scope of the Bill of Rights to cover actions by State govemments as well as the United States federal government. Given that the Congress was also formulating a federal civil rights act at the same time, it is plausible that its members were also seeking a constitutional basis for federal laws preventing discrimination against newly freed slaves.

" ln Barronv Baltimore

(1833) the Supreme Court held that the Bill of fughts applied only to the United States govemment, not the States, even where the wording did not expressly make this clear. Tribe. 1988p3n. Also,Pritchett. 1977. p289.

Section

I of the amendment provides

that:

all persons born or naturalized in the United States and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside ["the citizenship clause"].

No State shall make or enforce any law which shall abridge the privileges and immunities of citizens of the United States ["the privileges and immunities
clause"];

nor shall any State deprive any person of life, liberty, or property, without due process oflaw ["the due process clause"];
nor deny to any person within its jurisdiction the equal protection of the laws ["the equal protection clause"].

I submit that,by examining the Supreme Court's treatment of the Fourteenth Amendment over the years, it can be seen that the outcome of conduct regulation
depends critically on the attitude of the regulators rather than on the words themselves. First, the Court proceeded to read down each of the clauses of the Fourteenth Amendment:

in the Slaughter-House Cases (1873), the Court restricted the privileges and immunities clause to those privileges and immunities derived from United States citizenship, but not those derived from State citizenship, thereby limiting its use in State courts;32 beginning with Hurtado v Califurnia (1.884), the Court restricted the due process clause by refusing to incorporate into its meaning the specific processes set out in the Bill of Rights;" in the Civil Rights Cases (1883), the Court in effect restricted the equal protection clause to cover only actions by a State, not by individuals, thereby ti*iting its effectiveness in pieventing discrimination by individuals3a. Finally in Plessy v Ferguson (1896), the Court allowed the States to impose racial t"g."guiion by adopting a "separate but equal" doctrine.35

Pritchen. 1977. p 417. Also Tribe. 1988. pp550-552, 555-556. Pritchett. 1977 . pp 417 -420, Requirement for indictment by grand jury (Hurtado), the right to trial by ju.y (excluded n Mqxwell v Dow, 1900), protection from forced self-incrimination (excluded in

" "

Twining v New Jersey, 1908), protection against double jeopardy (excluded n Palko v Connecticut, lg37 - on a capital charge!), and the right to have defence counsel appointed by the court (excluded in Betts v Brady, 1942, ibid, pp 450-453). 'o Pritchett. 1977. pp 485-487. Also Tribe. 1988. pp 331, 351. "Pritchett. 1977. p490. AlsoTribe. 1988. p1474.

10

At the same time, the Court was reading unexpected new meanings into the words of
the amendment:

in

1886 the Court decided that the term "person" included corporations;36

in Chicago Milwaukee and St Paul Railway Company v Minnesota (1890) the Court introduced the idea that "substantive" due process must be observed by States in setting regulated railway rates;37

by 1897 the Court had decided that the liberty "mentioned in [the Fourteenth] Amendment . . . is deemed to embrace the right of the citizen. . . to live and work where he will; to earn his livelihood by any lawful calling; to pursue any livelihood or avocation, and for that purpose to enter into all contracts which
may be proper, necessary and essential to his carrying out to a successful conclusion the purposes above mentioned";]8 *d

in Smyth v Ames (1898), the Court held that State regulated railroad rates which - in the opinion of the judges - did not permit the railroad owners a fair return were a denial of due p.ocess.3e

Until the mid-1930s, the Court used its new interpretations of liberty and substantive due process to overturn economic regulation of corporations and business. On the one hand, State laws regulating working hours or minimum wages, or protecting workers' rights to join a union could be overturned because they infringed the 'liberty' of workers to contract with their employer, ignoring the potential unfairness of having
workers negotiate from a position of weakness.a0 On the other hand, regulated rates of retum were liable to be disallowed if - in the opinion of the judges - they were unfair to the owners of property.

Conduct regulation: regulatory capture

These Court doctrines, and others which limited legislative and executive power at both the state and federal level, continued until the 1930s when they were overturned in response to the Roosevelt's "court-packing" plan.al This might b. ,""n as the

Sqnta Clara CounQ v Southern Pacific Railroad Company. In San Mateo County v Southern Pacific Railroad Company (1882), counsel for Southern Pacific Railroad, Roscoe Conkling, who had been a member of the congressional committee which drafted the amendment, had argued that this was the intention of the legislators. That case became moot and was dismissed, but the notion of persons being corporations was retained by the Court. Subsequent publication of the commiffee's minutes indicated that Conkling had misrepresented the debate, but the new doctrine remained. See Hamilton. 1966. p 145. [This and other essays refer to an earlier paper by Howard Graham: "The 'Conspiracy Theory' of the Fourteenth Amendment".] tt Pritchett. 1977. p 523.

36

tt Ailgeyerv Louisiqna. Pritchett. 1977. p523. 'n Pritchett. 1977. p 530.

ao

Lochner v New York (1905) on working hours (Pritch etr. 1977 . pp 526-527), Adkins v United States on federal legislation protecting union membership, and Coppagev Kqnsas (1915) on State legislation protecting union membership (Pritchetr. 1977. p 529). al Advocates ofconduct regulation are inclined to porffay the court-packing plan as a failure because it was never enacted. In fact, a close examination suggests the very opposite. Although the legislation to increase the bench was defeated in the Senate in June 7937 , the Court had by that time already reversed

l1

ultimate triumph of "right" over'hrong". However, I submit that it is merely a further example of regulatory capture: the combined force of the President and the Senate was sufficient to force the Court to change its opinion. It is notable that the first decisions under the new regime were those most desired by the Roosevelt administration. As late as 1942 the Court was still reading down due process requirements in criminal proceedingsa2 and it wasn't until the mid-1950s that the Court began to seriously address the "separate but equal" doctrine.43

It is easy to look back on decisions such as Plessy v Ferguson and criticise the Supreme Court as being "wrong". But it would be well to stop and consider how history might judge the regulatory doctrines which prevail today. How, for example, might the Supreme Court's protection of first trimester abortion - and its partial protection of second trimester abortion - be judged, especially as premature babies are viable at earlier and earlier ages? Or, at the other end of the political spectrum, how
might the Court's continued acceptance of capital punishment be judged, especially as a disproportionate number of those executed are poor or are from racial minorities, or as it is applied to the young or the mentally retarded?
Indeed, even as this essay is being written, the process of regulatory capture may be playing itself out in the appointments of John Roberts as Chief Justice and Harriet Miers as an associate justice. Future generations may (or may not) come to see 2005 as the year in which a conservative president and Senate "packed" the Supreme Court. Future generations may (or may not) come to see the doctrine of implied right of privacy used in Roe v Wade in the same way that we view the doctrine of "economic due process" used to protect railroad companies in 1898.

Franchising: representative government

In the govemment industry, franchising corresponds to the system commonly known as "representative government": representatives are selected through a competitive process for the right to administer the monopoly state for a limited time. At the end of the franchise period there is another competition for control of the monopoly. The franchisee is typically subject to some regulation during the franchise period.

Within this general framework there are many variations:

if structural regulation is in place, there may be separate

tenders for control

of

the executive monopoly and the legislative monopoly. The legislative monopoly itself may be divided into separate "houses" with separate competitions for each. The tenders for each of these may be held jointly or at different times; structural regulation may extend to franchising ofjudicial and administrative monopolies (e.g. elections for judges and dog-catchers);

its position and Justice van Devanter had announced his retirement, changing the majority on the bench. The legislation was defeated because the victory had already been won. o' Betts v Brady. ot Brown v Board of Education(I954, 1955). Pritchett. 1977. pp 494-497.

T2

the scope of the monopoly being franchised varies. In some states the permanent civil service remains in place. In others the successful executive franchisee replaces key administrators with its own appointees; the franchise may be for a fixed period, or the incumbent may have some control over when the next tender will be held, subject to a maximum term; and the maximum duration of franchises varies considerably. Members of the United States House of Representatives legislature are franchised for two years only, while French presidents are franchised for seven.

Although the introduction of franchising was an important advance in constraining the monopoly power of the state, franchising in the government industry suffers from the same shortcomings as in non-government industries:
lack of competition in bidding for, or awarding of, a franchise leading to:

collusion;
incumbency advantage;

principal - agent failure;

costs offranchise transfer; and

diffi culties of contract specification, and exploitation. In general there will be lack of competition in bidding for the franchise, especially if bidding costs are high. In practice, government franchises (being largely designed by the suppliers themselves) are usually tendered in such a way as to reduce the scope for competition:

all positions in the legislature are usually tendered on the same day.ao Thi. ensures that only candidates affrliated with a well organised and well funded political party have any realistic change of winning; and
single member constituencies where only one member can be retumed also confer a benefit on major parties. Proportional representation presents a lower barrier to entry, but this may be raised by requirin g a party to achieve a high minimum quota before qualifuing to return any members.

Lack of competition typically manifests itself through the development of a duopoly or oligopoly of political parties. To have a realistic chance of winning a tender, individual candidates must be backed by a party which can offer product branding

There are some notable exceptions such as the United States Senate, which retires one third of its members every two years. But, even here, the tendering of Senate vacancies is conducted on the same day as all House ofRepresentatives positions. The system oftendering all positions at once contrasts with normal corporate practice whereby company directors typically retire in rotation each year and

offer themselves for re-election.

l3

through access to coordinated mass media advertising and association with high profile candidates who have established brand recognition ("party leaders"). Such branding is especially important when all positions are re-tendered on a single day and media congestion prevents all but the best organised brands from delivering their advertising message to the market.
Parties also coordinate access to financial support from influential interest groups. To obtain interest group backing party candidates must, at the very least, be prepared to listen to their views. Formal or informal indications of support may also be required. Well financed and well organised interest groups often support several parties equally.

Lack of competition has several consequences. First, there is collusion'. political parties which are the favoured tenderers typically agree on many, if not all, of the most important policies. This avoids competition in areas which would be detrimental to them all. For example, major parties typically agree not to:
reduce the power and scope of the monopoly for which they are competing, for example by granting independence to a region, by creating competing chambers of the legislature, or by introducing direct democracy;4s

campaign to reduce their salaries, or terms of office, or otherwise to limit the conditions of their franchise; or campaign for electoral reform (for example, proportional representation) which would make it easier for smaller competitors to enter the market. On the other hand, major parties typically:

try to win the support of influential interest groups;

dismiss (as "populist") any policies which have clear majority public support but risk antagonising influential interest groups;46 and
design election funding laws to their own advantage, providing public funding for parties (such as themselves) which have representatives elected but not for others.

ot

For example: "I was to have given a paper [on direct democracy] to your conference on 3l July 1994,but three days before . . . I had spoken at a seminar in Canberra on direct democracy that I had organised with a number of parliamentary colleagues. As a result there was a lot of political controversy within the Coalition Opposition about my views . . . and I was prevailed upon not to make my presentation." Reith. 2003. p 87. a6 The objective difference between "popular" and "populist" is one which is never fully explained: if policies aren't pursued because they are desired by the populace, then in whose interests are they
pursued?

t4

Lack of competition also manifests itself in incumbency advantage: unless an incumbent franchisee is particularly inept, it is often difficult for a competitor to displace it in re-tender. For example:
incumbents may bring all the power of government to advertise their qualifi cations for reappointment; incumbents may seek to manipulate the economic cycle to their won advantage: for example, raising taxes or interest rates early in the franchise period then lowering them as the re-tender approaches;

in some states, incumbents may some discretion over when the next tender be held, bringing it forward if they are likely to win, or putting it back if they are not; and

will

in some states, the incumbent may be able to change the tender process to
disadvantage smaller competitors.

Principal-agent failure manifests itself in the failure of legislative franchisees to act on behalf of their principals. In the parliamentary system it is almost unknown for legislative franchisees of the winning party to cross the floor in such a way as to bring down the govemment. In this case a tender which is in form being conducted only for the legislaiure is in substance being conducted for both the legislature and executive.aT
The cost offranchise transfer may manifest itself in different ways:

in a typical parliamentary system, talented potential administrators sit in "opposition" for years on end, and experienced ministers can be thrown into years of unemployment overnight if their faction fails to win a re-tender; and

in a typical presidential system, an incoming administration must fill dozens or even hundred of positions, often with people of little skill who are owed

political favours.

If it is difficult to specifying the franchised operation of something simple like garbage collection or a toll road or an airport, then specifying how a tenderer is to administer a sovereign state is quite impossible. Prospective franchisees can and do tender on the basis of undertakings which are never fulfilled. Behaviour which in any other industry would lead to prosecution for misleading or deceptive conduct is grudgingly endured in the government industry as being an inescapable part of politics.a8
Franchises suffer from difficulties of contract specification.

a7

o8

Lord Hailsham's "elected dictatorship". Indeed the very term "politician's promise" is

byword for cynical deceit.

15

Finally, like other franchised industries, the franchised government industry suffers from exploitation. There is a presumption that those individuals who work hardest to win the franchise will be those for who covet the exercise of power most strongly. There is a presumption that those interest groups who pay the most to support political parties are those for whom the returns will be greatest.
[S]uppose that a monopoly right is to be auctioned; whom will we predict to be the highest bidder? Surely we can presume that the person who intends to exploit the monopoly power most fully, the one for whom the expected profit is highest, will be among the highest bidders for the franchise. In the same way, positions of political power will tend to attract those persons who place higher values on the possession of such power. These persons will tend to be the highest bidders in the allocation of political offices. . . . Is there any presumption that political rent seeking will ultimately allocate offices to the "best" persons? Is there not the overwhelming presumption that offices will be secured by those who value power most highly and who seek to use such power of discretion in the furtherance of their personal projects, be these moral or otherwise? Genuine public-interest motivations may exist and may even be widespread, but are these motivations sufficiently passionate to stimulate people to fight for political offrce, to compete with those whose passions include the desire to wield power over others?ae

Cooperatives: direct democracy

In the government industry, corporate cooperatives coresponds to direct democracy: the customers of the government industry jointly control the supplier and exercise continuous rather than period control over elected managers.
The mechanisms of direct democracy include the following: recall provisions which can require elected managers to re-contest their position before the normal expiry of their term. This is analogous to the calling a meeting to vote on the removal of a director; mandatory voter approval for certain types of government action. This is reflected in the amendment provisions of Section 128 of the Australian Constitution or Article 140 of the Swiss Constitution;

two forms of direct legislation:

popular veto, which allows a specified number of voters to call a referendum to veto legislation which has been enacted by the legislature but which has not yet taken effect. For example, Article 141 of the Swiss Constitution allows 50,000 citizens entitled to vote or eight cantons to submit federal statutes to the "vote of the People" (i.e. approved if a majority of those voting approve). The "Schengenland" bilateral treaties were submitted to popular vote this year and approved; and

n'Brennan

and Buchanan. 1985. p 64.

t6

legislative initiative, or "citizens initiated referendum", which allows a specified number of voters to propose new legislation or a change to the state's constitution. For example, Article 140 of the Swiss Constitution allows 100,000 citizens entitled to propose ao'partial revision" of the Constitution which is then put to the "vote of the People and the Cantons" (i.e. requiring the approval of both a majority of those v-oting and a majority voting in a majority of the
cantons);5u and

non-binding indicative referendums and citizens indicative referendums. Indicative referendums may influence a legislature by making it politically difficult to enact legislation which is clearly contrary to the opinions expressed in a non-binding referendum.

Other important features

of

Swiss direct democracy include the following:sl

when an initiative is submitted to the vote of the People and the Cantons, the Parliament is required to recommend its approval or rejection of the proposal. In practice, each ofthe parties represented in parliament publish their voting recommendations;s2 and

if Parliament recommends rejection of

voted on simultaneously.

an initiative, it may submit its own counter-proposal in which case both the proposal and the counter-proposal are

As with cooperatives, the main shortcoming of direct democracy is its inability to reconcile divergent interests of citizens. The double majorities required under Article 140 of the Swiss Constitution go some way to preventing a simple "tyranny of majority", but neither this mechanism (nor indeed any of the mechanisms discussed so far) solve the problem of how to reconcile irreconcilable groups of citizens.

Competition by comparison: federalism

In the government industry, competition by comparison corresponds to the system of federalism.
Federalism allows:

. .
50

irreconcilable groups of citizens to adopt different policies in different jurisdictions;

some customers (typically the more mobile) to enjoy competition through their ability to move from one jurisdictions to jurisdictions; and
Switzerland has 20 cantons and 6 half-cantons. Each half-canton has only one halfofa cantonal

vote. Swiss Constitution, Article 142. tt Swiss Constitution, Article 139, sections 5 and 6.
See rvr\'$'-swirspolilg5.rug, the politics web page of swissinfo/Swiss Radio tntemational (a division of the Swiss Broadcasting Corporation). Ballot and election reminders, with links to voting recommendations, are forwarded automatically by email to citizens and non-citizens on request.
52

I7

comparisons of performance of the government industry in different jurisdictions.

Precisely because federalism does allows competition, it may be expected to meet opposition from those participants whose interest are best promoted by lack of competition. Accordingly, federal structures - if they are to survive - require extensive structural regulation to prevent their being dismantled by government services providers keen to establish, or re-establish, a govemment industry monopoly.

As discussed above, structural regulation to prevent regulatory capture is poorly developed in Australia. Consequently, federalism in Australia has been largely dismantled.
Several factors have contributed to the progressive transfer of governmental powers from the various regional monopolies to the central monopoly. These include:

. .

to the lack of structural separation between legislature and executive discussed above;
a weak Senate, due

in the absence of cooperative mechanisms, an almost total reliance on franchising to control abuse of existing monopoly power to acquire more power;
a generous interpretation by the regulator of the supremacy provisions

Section 109;

expansive interpretation by the regulator of particular powers assigned under Section 5 1, specifically: corporations power; and external affairs power;

centralised control of taxation, including the striking down of State taxes; and extensive use of appropriations:

Section 96, including the ability to force the ceding of further effective powers in exchange for fundingi and Section 81, including the use of appropriations for activities outside the scope of powers assigned under Section 51, approved by the regulator.
The shortcomings of federalism mirror those of competition by comparison:

the inability of immobile customers to benefit from actual competition; and

18

the possibility that maintaining several smaller monopolies may require an inefficiently small scale of production compared with a single larger one.

These shortcomings may be handled though the more elaborate system of a

sovereignty market.

Competitive restructuring: sovereignty markets

There is not space to discuss in detail the structure and operation of a fully competitive goveriment industry. Essential elements of a sovereignty market would include:

identifuing and structurally separating those components of the industry which are irreducibly monopolistic and transferring them to a monopolistic "metastate" which would be handled using one or more of the models described above. The functions of the meta-state might include:
regulating the incorporation of new states (using a model combining features of the "oppression" provisions of corporations law and Article 29 of the German Basic Law allowing for the creation of new liinder);

liquidation of redundant states;

mergers of states (using a scheme of arrangement model drawn from corporations law); sovereignty trading between members of the sovereignty market; admission of non-members; and possible expulsion of members from the sovereignty market;

allowing substantive government to be undertaken by the competitive states within the sovereignty market;
establishing a factor market (or "sovereignty exchange") which would allow states to contract out to other bodies politic those govemmental functions which it is not necessary to supply internally. This would allow the minimum viable size of a state to be reduced. A sovereignty exchange might use a virtual federal model (modelled on the 1990 cooperative scheme for Corporations Law in Australia, elaborated to correct some defects of that scheme, and/or the sovereign contracting provisions of Section 105A of the Australian Constitution); and

oovirtual monopolies" to handle using "vesting contracts" to create temporary transitional risks during the transition from monopoly to market system. Vesting contracts might also be used to handle any market failure which might arise from time to time within the sovereignty market itself.

t9

of this system are already developing informally' It is worth noting that some aspects iEuroland" is supplying culrency services to some' but In Europe, the virtual state of is similarly supplying members of the European Union while^';Schengenland" not all,

i-*lg.ution

is also supplying its and other seruices. Signifrcantly, Schengenland members of the European Union' services to Norway and Switzerland which aie not

20

Reference list

Federal Constitution of the Swiss Confederation ("Swiss Constitution") Online source

downloadedfromFedera1Chancellerywebsiteu@4]|.-!1!!,23
May 2005.
German Basic Law ("German Basic Law") As amended up to and including23 August I976. Trcnslation published by the Press and Information Office of the Federal Government, Bonn. 1986.

Baum, Lawrence. 1989. The Supreme Court. Third Edition. CQ Press: Washington D.C. Brennan, Geoffrey and Buchanan, James. 1985. The reason of rules. Cambridge University Press
Coase, Ronald. 1960. 'The Problem of Social Cost' in The Journal of Lmu & Economics. Volume III. October 1960.

Flynn, Martin. 2003. Human Rights in Australia. LexisNexis Butterworth. Chatswood NSW.
Frank, Robert H.2003. Microeconomics and Behaviour. McGraw-Hill/Irwin: New

York.
Jones, J

A P. 1971. King John and Magna Carta Longman.

Hamilton, Walton H. 1966. 'The Path of Due Process of Law'. InAmerican Constitutional Latu. Historical Essays. Edited by Leonard W Levy. Harper Torchbooks: New York.
Posner, Richard. 2001. The Frontiers of Legal Theory. Harvard University Press.

Pritchett, C Herman. 1977 The American Constitution. 3rd Edition. Tata McGrawHill: New Delhi. Reith Peter, 2003. "Let's Give Democracy a Chance: Some Suggestions". In Upholding the Australian Constitution. Volume 15. (Proceedings of the Fifteenth Conference of the Samuel Griffith Society). The Samuel Griffith Society: Lane Cove, NSW. Tribe Laurence H. 1988. American Constitutional Law. Second Edition. The Foundation Press: Mineola, New York. Vickers, John and Yarrow, George. 1988. Privatization: An Economic Analysis. MIT Press: Cambridge Massachusetts.

Williams, George. 2002. Human rights under the Australian Constitution. Oxford University Press.
Winterton, George. 1980. Can the Commonwealth Parliament Enact "Manner and Form" Legislation? Federal LawReview. Volume 11.

2t