Overcoming the Agency Costs of Representative Government, Part 1

By Kyle Roberts

One of the disadvantages of a republic is agency costs.

The smaller the ratio between the people and their elected officials the more secure are the rights of the people. Conversely, the larger the ratio between the people and their elected officials the less secure are the rights of the people.

This ratio and its potential adverse effects are called the agency costs of government.

The vast majority of people are not directly involved or concerned with the daily operations of government – especially in an extended republic such as ours.

The more land there is to settle the more people can fall under the umbrella of the republic, and the more people there are the larger the ratio is between elected officials and the populace.

Minimizing the potential costs to freedom by elected officials — the agents of the people, as the founders referred to them — is one of the most important questions facing a sound republic.

Problems with Large-Scale Republics

In a large republic such as the one posed by Madison in “Federalist 10,” it is very difficult for the people to effectively monitor their elected officials. Accurate information is harder to acquire the more extended the republic becomes.

Social issues will increase in direct proportion to the increase in population. More issues means increased time requirements on the individual to stay abreast of the affairs of state; and more government manpower to manage those issues.

This has and will always lead to a separate government created by elected officials that exists within the government created by the people. This internal government is made up of unelected officials. It is done to pass off the work and stress load of a swelling republic.

In other words, a bureaucracy is erected to act as a deputy for elected officials.

The representation ratio and agency cost concerns apply here too. The more the ratio of elected to appointed officials favors elected officials, the more secure the rights of the people are. Yet if the ratio of elected to appointed (or hired) officials favors the appointed, then the rights of the people are less secure.

Bureaucratic states always tend to be large and overflowing. The result is the people feel swallowed up by the flood of information and technicalities associated with understanding their government.

In such a scenario, untrained human nature takes over. Most people ignore what is too hard. Instead, they pursue more short-term pleasurable activities – thus leaving the management of the government to the interested few.

This is compounded by the fact that large electoral districts in an extended republic tend to be dominated by big money and organized power.

The voice of the common man is drowned out. Worthy candidates either don’t want anything to do with government or they lack financial and public backing to compete.

In a growing republic, the costs to freedom of delegating power to a representative agent increase the longer the republic lasts.

Checking the slide from republic to bureaucracy (or empire) is therefore one of the most critical questions for the science of statecraft and political economy.

Madison’s Suggestion

The famous “Federalist 10” proposed to solve the chronic problems of historical republics and democracies. His model was based around preventing a faction, or interest group, from becoming a majority, taking over the government, and violating the rights of everyone else.

He suggested that the adverse effects of factions would be diffused by geographically extending the republic. This would distribute the masses, and thus various interests, over an extensive territory. This would then prevent any group from dominating the whole and corrupting legislative assemblies.

Unfortunately, everything he claimed his model would subdue and prevent has happened anyway.

Removing Causes or Controlling Effects

Madison asks whether removing the causes or controlling the effects of faction is the best method for preventing any interest group from becoming a super-dominant majority.

Madison favored controlling the effects. He only saw two possible methods for removing the causes of faction, both of which he said were inherently wrong.

Either destroy liberty by stripping the people of their rights and creating an authority independent of the people (a king), or clone the people by giving everyone the same passions, goals, interests, and worldview.

This reasoning makes plain Madison’s two assumptions for the creation of and adverse effects of factions: 1.) man’s naturally independent mind, and 2.) his inherent liberty. Destroying these, he said, would be worse than the disease of faction.

Yet there are other methods for removing the causes of faction that don’t require liberty or freedom of conscience to be violated. He failed to mention them in “Federalist 10.”

Interests Versus Power

Madison failed to mention the other methods because his focus was on distributing interest groups instead of distributing power.

Within the Democratic-Republican Party built around Jefferson’s philosophy these two theories of distributing interest groups versus distributing power conflicted and competed.

Those who favored the distribution of interests tended to be nationalists favoring a strong central government.

Those who favored the distribution of powers aligned themselves with traditional country party ideology. They favored a balanced relationship between the states and the general government and effectively devolving power away from the center place of government.

Also, nationalists tended to be more willing to read into the Constitution implied powers to do things that were not expressly granted. Madison’s own presidency is a good example of the nationalist agenda.

A true Jeffersonian, John Taylor developed a concise and compelling argument in favor of country party ideology.

Taylor argued for, among other things, the need for strict construction of the constitution, ample check on the power of the courts to rule through extending precedent, concurrent review of the Constitution, and adequate distribution of power away from the center place of government to the sovereign states and their localities.

This theory also makes up what was the original theory of federalism as championed by the misnamed anti-federalists. It was Hamilton who labeled those who were against the Constitution anti-federalists, and claimed the name of federalists for the friends of it.

The name Federalism was hijacked and its true philosophy was tweaked. Over time it was changed into something resembling a modern form of feudalism with a central power (Washington) surrounded by devoted feudal baronies (states).

True federalism as set forth by country party ideology in England and adopted by the misnamed anti-federalists was much different.

Their focus was on effectively distributing power away from the center place of government and strictly adhering to proper construction of the powers granted by the central government.

The idea was to prevent the possibility of any interest group (particularly the monied interests) from exercising undue influence on representatives and violating the rights of the people.

It was a philosophy that aimed at removing the causes of faction in a republican representative system by broadly distributing power not just interests.

Federalism: A Brief Historical Review

The original theory of federalism arose from the landed gentry’s fear that government had grown too bureaucratic and was dominated by monied and financial interests.

These interests tended to grow up around the central city of government and exercise immense pressure and influence over elected officials.

This arrangement tended to aggravate the conflict between economic classes; specifically between the producer class – the small family farm and traditional merchant, and the capital class – managers of large-scale capital.

Such an arrangement to mitigate the domination of capital consisted chiefly of a dispersion of power. This would reduce intrigue and make the rights of the people more secure by placing more of the powers of government closer to home.

I spoke above about the agency costs theory of government. That theory initially arose out of the producer class opposition to the Bank of England in the late 17th century. It resurfaced in America over opposition to the Bank of North America by those who would eventually be labeled as anti-federalists.

The opposition theory said that financial elites swarm the metropolitan and government centers and end up dominating parliament. Parliament is filled with ostensibly elected officials but it turns out that those officials chronically accept bribes from private financiers to pass legislation in their favor.

These financiers amass enormous fortunes by creating and underwriting public debt and secure preferred access and private monopoly over that debt. They ensure support in the legislature by promising and granting shares and securities in the corporations they create that end up underwriting the public debt.

The republic of elected officials who apparently represent the people is thus co-opted by a small group of super wealthy bankers who end up controlling both the laws and the monetary system.

Those who opposed this system knew it would dominate Congress – even if it was an elected body.

Anti-Federalists claimed that big banks were chartered in the capital and had a disproportionate influence over the national legislature. These banks chartered by the central government exercised too much power over the central government.

Since electoral districts tend be very large, it is difficult for anyone without a lot of financial backing to compete. The result was that those who were elected were bought out by the financial interests, and thus placing the rights of the people at risk.

It was the concern over these costs that led to the development of the principles of federalism.

To be continued…

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Kyle Roberts is a small business owner who has committed his life to the cause of freedom. He is dedicated to recreating strong local self-government in his community by creating, and helping others create, institutions that create and preserve freedom.

He teaches a four-part lecture series on the Original Understanding of the Constitution for free to the community.

Kyle and his wife Kim own and operate Prudent Living Food Storage. They live in Spanish Fork, Utah with their two children.

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