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V. The Comparative Economics of Federalism

Imagine federations as running along a spectrum according to the relative degrees of central and member-state power. At one extreme is the unitary state in which there is only a central government, the formerly independent states have disbanded their governments. The United Kingdom is an example. At the other extreme is an extremely loose association of independent states, working in conjunction only for very limited purposes. A regional defense pact or free-trade association is an example. A federal system with a relatively strong central government and weak member governments would be closer to the unitary-state end of the spectrum, while a confederation (in which the central government was subordinate to the member-state governments—as, perhaps, in the European Union) would be closer to the loose association end of the spectrum.

If we were to take the founding documents of the United States and Canadian federations as the basis on which to place those federations along this spectrum, we would place them at very different points. In the case of the United States, the Constitution assigned specific and relatively limited ("enumerated") powers to the federal government and reserved residual governmental powers to state governments. So, we should place the U.S. federal system toward the loose-association end of the spectrum. In the case of Canada, the B.N.A. Act sought to create a strong central government and weak provincial governments, so that we should place Canada toward the unitary-state end of the spectrum.

However, we have also seen that over time federal-state relations in the United States and federal-provincial relations in Canada have changed. The U.S. has drifted toward the unitary-state end of the spectrum, and Canada has drifted toward the loose-association end. Indeed, if we follow Professor Hogg's characterization of the current state of Canadian federalism, Canadian provinces have more power, relative to the central government, than do the states in the United States.1

The two issues that the economic theories of federalism and of comparative law ought to try to resolve are, first, "What economic factors explain the different starting points of the U.S. and Canadian federations?" and, second, "What economic factors explain the changes in these two federations in the relative powers of the central and member-state governments?"

Let me begin with the different starting points. The central difference appears to have been a stronger commitment in the founding document of the United States than in that of Canada to member-state sovereignty and a suspicion (and, therefore, explicit limitation on) central government power. Of course, one of the possible reasons for this difference is history. Canada remained tied to Britain far longer than did the United States (two hundred years longer), and the strength of the bond was, for much of that period, much greater. That surely affected the structure of the Canadian federation. I would not want to make too much of this argument, but perhaps the long-standing bond with Great Britain created a stronger predisposition in Canada toward the unitary state of Britain. This would have evidenced itself in the Canadian federation by tilting the scales in favor of a stronger central government and weaker provincial governments. By contrast, the United States began in literal rebellion against Great Britain and in figurative rebellion against the British forms of government.

I am inclined to place a lot of stock in this historical explanation for the differences in the starting points of the United States and Canadian federations, but I do not want to dismiss too hastily the possible effect of other, real factors that the economic hypothesis favors. Consider the influence of geography. Among the original thirteen colonies of the United States communication and transportation were very good. The extensive river network into the interior, combined with coastwise transportion, made even relatively remote sections of the colonies accessible to one another. Therefore, there was no particularly compelling case for a national government to assume extraordinary powers so as to foster large capital-instensive investments to unite the original colonies. Nature had provided that unifying network. By contrast, when Canada formed its federation in the nineteenth century, the country had already stretched from the Atlantic to the Pacific, and the population was sparsely distributed along an extremely narrow band of almost 5,000 miles. Whatever other forces there may have been compelling Canada to form a federation in which the center was strong relative to the provinces, this geographical fact added some strong compulsion in favor of a strong federal government. Economic unification among the provinces would have been less likely in the absence of a unifying transportation and communication network, and without that economic unification, the federation might well have foundered. Indeed, the necessity for a centrally-financed railroad running from Atlantic to Pacific was a tremendously important factor in the early Canadian federation.

What real and other factors have explained the changes in the two federations in the division of governmental responsibility between the central and member-state governments? We have seen that, their different starting points on the spectrum of federal power notwithstanding, the United States and Canada have shifted along that spectrum over time. Canada, according to Professor Hogg, now has a relatively weak central government and relatively stronger provincial governments, while the United States has had, until recently, a relatively strong central government and relatively weak state governments. (We have also seen that there are reasons for believing that in the United States governmental responsibility is shifting back toward the states and away from the federal government.)

One possible cause for these developments is an evolutionary interpretation of the economic theory of comparative law and of federalism: from different points, the same real factors have compelled them to converge to roughly the same point on the federal spectrum. While history and geography may have dictated the different starting points, the factors that have been working on the two societies for the last 100 years have been more or less the same—e.g., the technological improvements in communication, transportation, production, and consumption and the general integration of the world economy. These factors, plus individual country factors like those noted in the discussion of trends in United States federalism, compel changes in the appropriate division of authority as between member-states and the center. While the exact forces may have been slightly different in the two countries, they have been sufficiently similar that I find it not at all surprising that the two federations have reached a roughly-identical division of governmental authority.2

Let me conclude this section with some additional observations about the reach of these economic theories in explaining other federations and in predicting changes in the future. I want to reiterate what I think is the central point about the economic theories of comparative law and of federalism—namely, that similarities and differences in laws (including the structure of federations) across countries are significantly affected by real economic factors; indeed, I would go further than this and assert that the effect of real economic factors on legal similarities and differences is at least as great as the effect of ideology.3 The exact relationship between these real factors and the changes in United States and Canadian federalism is unclear, but I trust that in the near future we shall begin to uncover them and to try to become much more specific about which real factors and to what extent they exert effects on legal rules and institutions. Just as importantly, we should seek to press the comparative study of federalism to other federations and to press the economic theory of comparative law to look at additional legal subjects.

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1 Professor Hogg made this characterization before the New York and Lopez decisions in the United States Supreme Court and the apparent changes that have occurred in federal-state relations since the November, 1994, elections. Perhaps these developments would make the relative power of the provinces in Canada and the states in the United States more similar than they appeared in early 1992. 2 I have not returned to the importance in Canadian developments of the attempts to deal with the linguistic and cultural differences of Quebec. Those attempts may be a significant factor in the devolution of power to the provinces in the Canadian federation. There is, so far, no comparable effect on the United States. 3 An important implication of this point is that people frequently misapprehend the causes of important political trends. For instance, many commentators today are highly exercised about the Supreme Court's apparent push to strengthen states' rights at the expense of federal rights. They attribute that change to ideological forces and make elaborate plans to combat those forces. While I do not discount ideology as a force in politics, I am convinced, on the basis of the observations of Professors Petersen and Rivlin, that the trends in state-federal relations have a significant real, economic cause, which is completely independent of ideology. To the extent that changes in those real factors are at work, the ink and effort spilled on combatting dark ideological forces is partially wasted.