American law needs fixed rules and formal boundaries, not an ever-changing set of guidelines based on a judge’s whims. Richard Epstein, professor of law and director of the Classical Liberal Institute at New York University, explained why during a recent public presentation for the John Locke Foundation.

Epstein: There’s a very high price that is paid for people to say, “Gee, we do not really know what is going on in these cases,” because the moment you sort of argue that there are no fixed rules, that there are no formal boundaries, what happens is you are necessarily left in the position where there’s no law at all, and now what you do is you fall into chaos.

Or where there’s a huge amount of legislative discretion, where when you decide that the various government agencies issue edicts and diktats, these are perfectly clear because they’re willing to back them up with a gun. And what you have to do is to have a much more sensible view of language, which is that relativism is always wrong; that every legal rule, on the other hand, is presumptively valid, but it’s subject to various kinds of principled exceptions.

And then you figure out how you develop them in the tort laws because of assumption of risk, and contributory negligence, and … so forth. With property, it turns out to be a rather sophisticated body of nuisance law. And if you start out with the notion that you can actually make sense of this system if you work hard at it, you will make sense of it.

But if you take the opposite kind of position, and assume that the world turns out to be just this unruly, disorganized, and rather problematic place, then you will lapse into the form of rational basis discourse, which says, you know, there’s a good argument for saying that two plus two equals five, and we’re not going to say that it’s right, but who are we to say that it turns out to be wrong.

And so you start seeing extreme statements of that form go. Now, what happens is that discretion in virtually every case is directed — in the cases I’ve talked about, at least, and it’s a large part of the world — to the choice between state monopoly and private competition. And on that choice, we have a clear and uniform body of economic, political, and social theory, which says that competition in markets for goods and services, across and within states, outperforms the other regulatory system, and we have a Supreme Court, 9-0 today, which doesn’t seem to have understood that particular proposition, and so announces various forms of ad hoc fixes — a very bad doctrine — so that the liberals are consistently wrong and the conservatives are consistently confused.

After his speech, Epstein offered more details during a discussion with Mitch Kokai for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)

Kokai: It sounds as if you believe judges and lawyers open the door to a lot of problems if they don’t focus on the fixed meaning of constitutional terms.

Epstein: Yeah. Look, I mean, one of the key features about the Constitution is that its major terms are put into place by people who actually thought they knew what they meant. And so you take something like commerce. There was this long debate about it, and people, I think, were pretty clear that it meant various forms of trade and communications across state lines. The antitrust laws, which involve multistate conspiracies, were not on the horizon, and 20 or 50 years later would present a very serious problem of what to do.

But the thought that somehow the term was so unclear that manufacture, which is normally used in opposition to commerce, is now treated as a subset of it, simply distorts the English language. You look at the uniform commercial code, which deals with commercial transaction, and they talk about sales, and they talk about leases and secured transactions, and bulk sales and things like that. They don’t spend their time talking about how it is you fabricate a better widget, because it was understood, as the old guys said, that commerce followed manufacture and proceeded consumption. It was a middle leg.

There’s nothing about that particular sort of trichotomous universe which is rendered obsolete because we have fancier machines for producing things and better modes of communication for shipping them. It’s still a tri-part passage, and the division of labor is reasonably clear, and to the extent that you have a constitutional term, you cannot argue that it has become ambiguous with new technology when, in fact, the division of labor is exactly what it was before.

And when you start talking about liberty and property, these are also bright terms, and liberty, of course, means liberty of action, within the limits of the tort law — I am free to go about where I choose, but I am not free to break your nose and so forth. But it’s also liberty to act in cooperation with others. This is subject to a limitation if you’re engaged in restraints of trade or conspiracies to murder, but in the normal situation, the only way in which liberty is worth something is through cooperation and trade. That could either be through exchange of goods or through the formation of a firm.

And the idea that liberty somehow or other covers only motion and doesn’t cover firm formation or other kinds of good sale is a perversion of the original language. And ironically, Justice [Oliver Wendell] Holmes is the villain in this, because he said exactly the opposite. He said, “I think the term ‘liberty’ is perverted when it goes far beyond liberty of action.”

But, of course, it’s perverted when it’s only narrowed in that particular area. Ordinary understandings give you a lot of information about what a word means, and the difference between these two definitions is simply enormous, because one of them protects you only against incarceration and the other protects you against all forms of invidious regulations, which are designed to suppress your gainful activities.

And the former is clearly the more important thing. I mean, we don’t want arbitrary arrest. That doesn’t mean that the second is unimportant.

Kokai: Do judges abrogate their duty if they refuse to accept that some terms have fixed meanings?

Epstein: My view about it is that judges have to always be on the top of their game. If they’re going to say there ought to be deference to a particular branch of government, they have to give a clear, substantive theory as to why that’s the case, and you can supply that.

If you start looking, for example, at corporate law, if you have a board of a corporation, or its chief executive officer, who is required to make complex business judgments as to what transactions to enter into [with] outside parties, they always receive the benefit of the business judgment rule, and the explanation is pretty clear. If they make a good judgment on these things, everybody applauds. When they make a bad judgment, if you require them to pay, you’re going to have to pay them a fortune to cover their future sins.

So good faith says you take it all as a bundle, and the only exception to that is a self-dealing situation, whereby you enter into a sneaky transaction with a related corporation that you own all the shares in, or you make a transaction with a spouse or a family member, and at that point, when you’re engaged in self-dealing, we have what we call a fair value rule. You’ll have to show that the corporation has not been built by your particular action.

Well, when you get to government agencies, exactly the same rule ought to apply. You’re trying to run a school system; it’s really very difficult. The thought that any time you make a judgment as to which teachers to hire or what curriculum to teach or what building to locate, a bunch of indignant citizens can sue you for that, it means that you can never run an ordinary administration. But on the other hand, if you wish to hire your cronies as partners in this operation, the fair value transaction applies.

One of the clear implications of this is you cannot essentially willingly create monopoly powers in anybody with whom you deal. So under my view, it is never a business judgment to confer monopoly power on those people with whom you trade, which means that you cannot have states authorizing public unions. But that doesn’t mean that a state can’t run an affirmative action program if it thinks that some kind of racial integration is going to do better than some other pattern.

When the Supreme Court basically doesn’t distinguish between those two kinds of cases, it gets itself into trouble, and that, I think, is a burden that the conservatives have to face on this particular case.

When government regulates, at that particular point, they don’t have the kinds of discretion that they have when they’re running their own business. They have to explain why the regulation is designed to prevent some kind of abuse by the firm that’s subject to the regulation, or it’s part of a comprehensive scheme that gives them return benefits that they couldn’t obtain in a voluntary market.

So the basic theory of the firm, the basic theory of competition, is the basic theory that informs the meaning of liberty and property, and since these are constitutional constants, essentially if you understand the underlying theory, it will give you shape to the constitutional discourse. And when people say, “Gee, it’s too hard to understand,” what they’re really telling you is, “We understand what the theory is. We don’t like this particular theory, so we’re going to ignore it.”