Perhaps the most famous metaphor defending the virtues of US federalism is that states can act as laboratories of democracy: that is, states can enact a range of policies, and can then learn from the experiences of other states. The phrase was coined by Justice Louis Brandeis in the 1932 Supreme Court case of New State Ice Co. v. Liebmann (285 U.S. 262). Brandeis wrote: \”It is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.\”
But there\’s a hearty dash of irony here. Brandeis, however admirable his sentiments about the states as laboratories of democracy, was writing in dissent. In the specific case, the state of Oklahoma had passed a law that required approval from a state-level Corporation Commission for anyone who wanted to start a firm that would make, distribute, or sell ice. The law required that all existing ice-related firms be granted approval by the Corporation Commission to continue functioning: it was only new firms that were required to appear before the Corporation Commission and to argue against the incumbent firms that they should be allowed to begin operations. Thus, the question before the Supreme Court was whether the states, as laboratories of democracy, might ban entry into certain market.
Justice George Sutherland, writing for the majority, argued that the Oklahoma law was unconstitutional under the \”due process\” clause of the 14th Amendment. Here\’s a taste of Sutherland\’s argument, which argues that state-level experimentation could happen in many ways, but not in a way that stopped people from engaging in lawful business. Sutherland wrote:
\”Plainly, a regulation which has the effect of denying or unreasonably curtailing the common right to engage in a lawful private business, such as that under review, cannot be upheld consistent with the Fourteenth Amendment. …
\”Stated succinctly, a private corporation here seeks to prevent a competitor from entering the business of making and selling ice. It claims to be endowed with state authority to achieve this exclusion. There is no question now before us of any regulation by the state to protect the consuming public either with respect to conditions of manufacture and distribution or to insure purity of product or to prevent extortion. The control here asserted does not protect against monopoly, but tends to foster it. The aim is not to encourage competition, but to prevent it; not to regulate the business, but to preclude persons from engaging in it. There is no difference in principle between this case and the attempt of the dairyman under state authority to prevent another from keeping cows and selling milk on the ground that there are enough dairymen in the business; or to prevent a shoemaker from making or selling shoes because shoemakers already in that occupation can make and sell all the shoes that are needed. We are not able to see anything peculiar in the business here in question which distinguishes it from ordinary manufacture and production. … It is not the case of a natural monopoly, or of an enterprise in its nature dependent upon the grant of public privileges. The particular requirement before us was evidently not imposed to prevent a practical monopoly of the business, since its tendency is quite to the contrary. Nor is it a case of the protection of natural resources. There is nothing in the product that we can perceive on which to rest a distinction, in respect of this attempted control, from other products in common use which enter into free competition, subject, of course, to reasonable regulations prescribed for the protection of the public and applied with appropriate impartiality.
\”And it is plain that unreasonable or arbitrary interference or restrictions cannot be saved from the condemnation of that amendment merely by calling them experimental. It is not necessary to challenge the authority of the states to indulge in experimental legislation; but it would be strange and unwarranted doctrine to hold that they may do so by enactments which transcend the limitations imposed upon them by the Federal Constitution.\”
In his dissent, Brandeis made several interlocking arguments. He argued that the ice business might have large economies of scale, in which case a few large firms could produce more cheaply than many small firms. In this setting, he argued that competition in the ice business could easily lead to a downward spiral of bankruptcies, and cited the past experience of railroads as a situation where capacity was overbuilt and mass bankruptcies occurred. He also argued that ice could be viewed as a \”necessity of life\” in Oklahoma. Here\’s a taste of the Brandeis argument (footnotes omitted):
In Oklahoma a regular supply of ice may reasonably be considered a necessary of life, comparable to that of water, gas, and electricity. The climate, which heightens the need of ice for comfortable and wholesome living, precludes resort to the natural product. There, as elsewhere, the development of the manufactured ice industry in recent years has been attended by deep-seated alterations in the economic structure and by radical changes in habits of popular thought and living. Ice has come to be regarded as a household necessity, indispensable to the preservation of food and so to economical household management and the maintenance of health. Its commercial uses are extensive. … We cannot say that the Legislature of Oklahoma acted arbitrarily in declaring that ice is an article of primary necessity, in industry and agriculture as well as in the household, partaking of the fundamental character of electricity, gas, water, transportation, and communication. …
The business of supplying ice is not only a necessity, like that of supplying food or clothing or shelter, but the Legislature could also consider that it is one which lends itself peculiarly to monopoly. Characteristically the business is conducted in local plants with a market narrowly limited in area, and this for the reason that ice manufactured at a distance cannot effectively compete with a plant on the ground. In small towns and rural communities the duplication of plants, and in larger communities the duplication of delivery service, is wasteful and ultimately burdensome to consumers. At the same time the relative ease and cheapness with which an ice plant may be constructed exposes the industry to destructive and frequently ruinous competition. Competition in the industry tends to be destructive because ice plants have a determinate capacity, and inflexible fixed charges and operating costs, and because in a market of limited area the volume of sales is not readily expanded. Thus, the erection of a new plant in a locality already adequately served often causes managers to go to extremes in cutting prices in order to secure business. Trade journals and reports of association meetings of ice manufacturers bear ample witness to the hostility of the industry to such competition, and to its unremitting efforts, through trade associations, informal agreements, combination of delivery systems, and in particular through the consolidation of plants, to protect markets and prices against competition of any character.
I\’m not confident that Brandeis\’s economics is coherent. If it\’s true that large established firms in the ice industry have a huge cost advantage from economies of scale, then presumably they shouldn\’t have much to fear from smaller-scale competitors. In such a case, there might be an argument for regulating the price of ice as a monopoly. But smaller-scale competitors seeking to enter the industry would immediately face losses and have little chance of gaining market share. Industries looking for protection always claim that hobbling the competition would benefit consumers, and such claims were especially popular during the Great Depression, but there is ample reason to be skeptical of such self-interested claims.